Holding Company

With minimal entry levels and growing demand in a new market, self-storage facilities can be an attractive alternative to traditional forms of property investment. As with any investment, the key lies in researching the market thoroughly before you wade into the waters.
Self-storage began in the 1980s and is one of the newest and fastest growing industries in Australia. In the past two years, self-storage space has grown by more than 20%, and occupancy rates have kept pace. About three-quarters of self-storage is used to keep household effects, the rest is used by business.

A recent survey revealed that less than 3% of the population use self-storage, and only 25% understand what it is. (For the record, self-storage provides secure space for people to store goods and access them as needed, without committing to a long-term lease. It differs from warehousing, where you are charged a fee to access your goods, and someone other than yourself handles them.)

Rennie Schafer, the executive officer of the Self-Storage Association of Australasia, which represents 90% of self-storage space in Australia and New Zealand, says the limited understanding and low take-up rate represent good growth potential and create opportunities for investors who want to try something a bit different.

“Self-storage is a new product so there’s a strong degree of pent-up demand,” he says. “This growth potential is attracting a diverse profile of private investors, ranging from experimenters who are willing to get in on the ground floor, to experienced investors, to mums and dads who see it as a way of entering the property market with very little capital.”

In the past 12 months, DIY super investors and institutional investors have come into the market, encouraged by the advent of industry-branded unit trusts. DIY super operators are also attracted to the low prices offered in self-storage because DIY funds cannot borrow to buy property assets.

Investors can get a foothold in the self-storage market in one of three ways: direct investment via by purchasing storage space under strata title; indirect investment via industry-branded unit trusts; and building or developing storage sites from scratch. The method you choose will depend on the amount you are willing to invest, and the degree of risk you are prepared to take.

DIRECT INVESTMENT

It’s possible to enter the market with a direct investment of as little as $20,000. “A lot of tradesmen take this option,” Schafer says. “They purchase the title and then use the storage facility to store their equipment.”

Other investors prefer to buy a storage unit and get a management group to rent it out for them, in much the same they would with a traditional residential or commercial property.

Peter Greer is director of operations at National Storage, which, along with Kennards Self-Storage, is one of the two largest storage companies in Australia. “Rental returns for storage units are currently about 9.5%,” he says, “though it’s becoming harder to get these returns as land values become more expensive.”

This compares favourably with residential property, where yields are 3–5% in the blue-chip investment areas of the main capital cities; and commercial property, where blue-chip yields are 6–8%.

Taxes and benefits such as income tax, depreciation and capital gains tax are the same as for other forms of property investment.

If there’s a fly in the ointment, it’s probably the issue of rental guarantees. Greer recommends caution when considering purchasing self-storage facilities with rental guarantees. “What happens when the guarantee expires?” he says. “Larger storage complexes, in particular, only have 60–70% occupancy. How do you know your unit is going to be occupied, rather than the one next door?”

Schafer agrees. “Guaranteed returns may look attractive, but it’s important to get independent advice about whether these returns can be sustained in the longer term.” He also says that, before you enter the self storage market as a direct investor, it’s important to think ahead. “It’s vital to have an exit strategy,” he says. “Self storage is a new industry, so the resale demand for strata titled units is unknown. How are you going to sell your unit when the time comes?”

UNIT TRUSTS

A more common way of investing in self-storage is through unlisted unit trusts. As is the case with traditional property trusts, investors don’t buy a parcel of the land on which the storage facility sits; they simply buy units in a trust, which distributes income.

These trusts have several advantages over strata title investments. First, they have interests in a number of storage facilities, so you can diversify risk. Second, they even out fluctuations in rental returns, so your income stream does not depend on occupancy rates. Third, it’s easier to develop an exit strategy because you can sell your units to other members of the trust.

On the downside, there are relatively few self-storage unit trusts, so getting into them can be difficult.

National Storage established Australia’s first unlisted self-storage unit trust in November 2003 with an opening value of about $130 million. Managed by APN Funds Management, the fund invests in 26 properties leased to National Storage. It’s currently worth $200 million and Peter Greer expects this to rise to $230 million when several new acquisitions come through. However, the fund is currently closed to new investors.

Valad Property Group and Kennards acquired the Millers self-storage portfolio in 2004. Valad manages the fund, which is worth $90 million.

The other player is Abacus Property Group, which manages a self-storage trust that invests in facilities leased to Storage King, another well-known industry brand. Abacus began an unlisted trust worth $100 million earlier this year.

Like any unit trust, self-storage funds charge fees for selecting and managing the investments held in the trust. Fees vary between trusts but as a guide, the APN trust charges an investment management fee of up to 0.4%, without entry or exit fees.

Peter Noonan, manager of direct property with APN, points out that unit holders have to bear the costs associated with acquiring new investments, such as stamp duty and legal fees. There’s also a charge of about 2.5% for managing each acquisition. If necessary, the trust will reduce this fee to stop future acquisition costs eating into investors’ returns.

BUILDING/DEVELOPING

If you have a lot of cash and a high tolerance for risk, you may prefer to develop and build a storage facility yourself. Schafer says you’ll need least $1 million for this kind of project; probably more depending on location, land value and the size of the proposed facility.

If you’re purchasing a single unit on strata title or developing a whole site, two key factors will influence your degree of risk and likelihood of success: location and management. “If you get these right, self-storage poses no greater risk than traditional real estate investments,” Schafer says.

Self-storage is a very localised market; the majority of customers live or work within a five or 10 kilometre radius of their storage centre. This means the quality of a particular location is determined primarily by its visibility to passing traffic. The busier the road, the greater the number of people who see the site and may consider renting space there. A critical population mass is also important; Greer suggests a minimum of 50,000 people living within five kilometres of the site.

The population issue is the main reason most storage units are located in capital cities. However, there is a small regional presence, with a 2000-unit facility in Townsville.

If you’re developing a whole site, you need to consider the potential demand against what it’s going to cost to buy the land and develop it, as well as how many square metres of storage space you can build, and the likely rental return.

Just as with traditional property investment, good management plays an important part in determining how well your investment performs. “The better facilities are managed onsite by people who know the local market,” Greer says. “Make the effort to shop around before you decide on a manager; speak to several companies and weigh up what each of them is offering.” As a guide, management fees are 1–1.5%.

FUNDING IT

Whether you need to borrow to buy a strata title or units in a trust, lenders view self-storage investments as similar to commercial property in terms of risk levels. This means your gearing will be limited to 60–70% of the asset’s purchase price.

However, APN’s Peter Noonan believes lenders look more favourably on investors looking to gear into a trust than investors wanting to buy a title, because trusts are known entities with legal responsibilities and documented corporate accounting practices.

ACTION PLAN

For private investors, unit trusts and strata titles can be a great way to enter the property market with minimal capital. For DIY super funds, which don’t allow leveraging, they can be a valuable way of diversifying the portfolio without having to borrow to purchase the asset.

Self-storage facilities are commercial properties, so they are best viewed as an income-producing investment, rather than a growth asset.

When it comes to the crunch, we believe that unit trusts are the way to go. Buying a strata title not only minimises diversification, but it increases your risk in a young industry where a resale market has not been established. Rental guarantees are often built into the purchase price, meaning you may pay more.