The rise of self-storage

The real estate market in Europe is challenging and crowded. The self-storage industry, however, is growing — and Ian Church argues its uneven development across Europe presents investors with an alternative opportunity.

Needing more space for belongings can depend on a number of changes in a person’s lifestyle, such as moving home, getting married (or divorced), and retiring. With increased urbanisation and apartments in cities gradually getting smaller and more expensive, many are finding they are simply running out of room. Self-storage facilities have stepped in to cater for this increasing consumer need, and as provision steadily grows, so naturally does its appeal to investors.

An uneven landscape

The first facility opened in Europe in 1980; today there are over 2,700 self-storage facilities across the continent totalling 7.76 million m2 of space. As an investment product, it is a relatively young and dynamic market, with 25 per cent more transactions in 2016, worth around €500m, than the year before. Yet it is highly fragmented. Only six countries have nearly 85 per cent of the total number of facilities in Europe; the United Kingdom has 39 per cent of the facilities.

 

Per capita, the figures differ dramatically. Iceland (18.1 facilities per million); the Netherlands (16.7) and the United Kingdom (16.5) lead the pack of countries where the market is established, while it drops as low as 0.3 in Poland and the Czech Republic, and 0.1 in Romania. This stark disparity is down to a lack of awareness of the product and financial markets not understanding the sector in the respective countries.

Low risk, high potential

In an increasingly challenged and crowded real estate market, investors may see the uneven development of the self-storage industry in Europe as an opportunity with high potential. In some circles, it is being called a solid, recession-proof investment with its diversity of income streams meaning inherently lower risk and better surety of income. In some markets, with income growth in mind, yields are even being compressed to levels that almost match more traditional asset classes.

One of the many elements that make self-storage appealing is that most properties are of basic low-rise construction. The locations for such facilities are usually suburban and near main arterial routes, meaning that obtaining the permission to build and the resulting construction can be quick, and that land is inexpensive. The inherent cost of building the self-storage facilities is low, and together with the covenant strength — that is, the financial strength of the tenant leasing the property –  provides resilient cash flow.

The right blend

As with all investment types, striking the right balance between the cost of land, build cost and likely income stream is key. However, with self-storage perhaps more than other asset classes, facility height, modularity and a considered approach to the “right” product specification has a significant impact on both operating costs (and hence rental levels), and as a consequence, investment returns.

Though a considerable number of first generation self-storage facilities are based upon adapted premises of different use, this is changing as operators become more sophisticated. Such an approach is proving to be more and more essential and appealing to institutional investors looking for long term, resilient income streams.

Well located, smartly designed self-storage facilities are accelerating the interest of institutional investors attracted to the diversity of income and growth story. The industry is here to stay, driven by an increasingly pressurised residential market. With people simply running out of space, it will be a substantial growth sector in Europe, and one on which investors will be keeping an eye.