If you’ve been thinking about investing in a self-storage facility, you probably already know a bit about the industry. But did you know that over the last 30 years, self-storage facilities have proven to be one of the most lucrative property investments available?

To understand why, it’s important to understand some investment fundamentals.

A self-storage facility is made up of land and buildings. Land is the ultimate reliable wealth builder, as it mostly appreciates in value. Buildings, on the other hand, support income generation, but depreciate. The more elaborate a building, the greater the depreciation.

Buildings also need regular maintenance.

Self-storage facilities typically control sizeable and valuable parcels of land. An average self-storage facility will be situated on around 1Ha of land and have a building area of 5000 sqm. Often the land fronts on to a highway in a metropolitan area. Over time as our population becomes denser, this kind of land generally becomes more valuable.

While this means that self-storage facilities themselves usually appreciate over time, it’s important to remember that land does attract substantial statutory costs, such rates and land taxes, where applicable.

Self-storage facilities have multiple tenants—some facilities have as many as 1000 units in variable sizes! Because rental income is generated across multiple rent payers, if an individual tenant vacancies or defaults have minimal impact on the overall income. Multiple tenants mean rental income is reliable and more than adequate to overcome the substantial costs of owning and operating the property.

Reliable Income generation is a self-storage facility’s greatest feature.

Self-storage facilities are designed for the storage of goods only, and not for for occupation by people. This means there are limited occupational requirements such as plumbing, lighting and ventilation. Associated maintenance and building costs are therefore kept to a minimum.

In order to value a self-storage facility for buyers and sellers, it’s essential to have an objective way to measure the value of a facility.

Self-storage facilities are complicated investments, made up of land and buildings and an ongoing business with clients and goodwill. It’s difficult to compare differing facilities across geographical areas. In valuing a facility, consideration must be paid to different levels of occupancy and different amounts of empty or vacant space. Some facilities have extensive hardstand or adjoining unimproved land, and their location will be better or worse than other comparable facilities. There may be addition income generated from the sale of merchandise like packing materials, or solar panel rental or even on-site signage. This is in addition to a differing cost structure, which might include wages, franchisee costs and offset costs such as solar rebates etc.

Nevertheless, a comparison is required in order to establish a likely selling price or value for interested parties such as prospective buyers and sellers of self-storage facilities, as well as financiers and insurance companies.

A ‘cap’ rates, or capitalisation rate, is a figure used to calculate the expected value of a self-storage facility. Cap rates are also known as yields.

Cap rates are expressed as a percentage and are a guide to the income generated on the capital invested.

In the 1990s, cap rates were running at around 13%. Since then, cap rates on self-managed facilities have dropped close to half, to about 6-7%.

In other words, buyers are now prepared to accept about half the return, compared with what they would have achieved back in 1990. This is great news for sellers.

One way to explain such a dramatic drop is this: there have been other significant changes to the cost of running facilities. Interest rates are much lower now, and substantial automation has contributed to reduced operating costs. Owning a facility now has becomes more profitable compared with the 1990s, as costs reduce. As a result, buyers have been prepared to pay more.

Before we sell a self-storage facility, we commission an independent valuer to assess the cap rate before we go public with the result. This gives us an independent assessment on the value of the property, which minimises conjecture.

Please email us if you would like a copy of these latest independent assessments.

There are around 1500 self-storage and drive up facilities in Australasia, with storage space per capita running at about 4 sqm.

Back in the 1970s and early 80s when the industry was in its early stages, self-storage facilities were established, owned and operated mostly by families concerns. Now the industry is dominated by large multi-national groups, some backed by public companies. These companies include National Storage, Kennards Self Storage, Storage King, Fort Knox Self Storage (Victoria) and Fort Knox Storage (Queensland), and StoreLocal.

There are about 50,000 self-storage facilities in the USA, with a storage space per capita of 55 sqm.

The industry was established mainly in Texas and Florida in the late 1960s and is now well-entrenched, with an estimated 10% of households keeping a storage unit. Investments in self storage continued to do well through the 2008 Global Financial Crisis, an environment where many businesses were failing. Early reports from 2020 are that it continues to thrive, although it hasn’t been resistant to a slight slowdown. Shopping Centres, though, have experienced a larger showdown, so investors have redirected funds that might otherwise been earmarked for shopping centres into self storage. This has brought new capital to the industry, for development into more facilities. Some industry experts are suggesting the industry is being ‘loved to death’.

New developments have seen innovative architectural designs in both new builds and the conversions of existing buildings. Recently, such innovative conversions have included a former Kmart store of 20,000 sqm being converted into self storage, and a newly built facility with a reception area that resembles the foyer of a hotel rather than a warehouse.

There are roughly 4000 self-storage facilities in Japan, however that figure is distorted in comparison with Australia because sometimes a small number of storage units are attached to another business, such as a laundromat or service station. A better measure is the storage space per capita, and this estimated at round 0.75 sqm, much lower than Australia or the USA. This points to substantial potential growth in the market.

The self-storage industry in Japan began in 1931 and is now the largest self-storage industry in Asia. It wasn’t until the 1970s, though, that self-storage became mainstream. Japan is also well known for its risks of earthquakes and its associated level of government regulation, and the self-storage industry is no exception. Japanese facilities require a higher level of compliance, with regulation of construction and of fire safety being paramount.

China has about 423 self-storage facilities however, like Japan, that figure is distorted in comparison with Australia as sometimes storage units are attached an accessory to another primary use. The storage space per capita is estimated at only 0.4 sqm, so very low indeed. China’s industry looks delicious for investors but the biggest restriction is that land tenure is leasehold. Regardless, there are a few large international groups establishing themselves in China and for them, the growth potential is exponential.

*Source SSAA

Below is an example of the figures behind a typical small self-storage facility, in inner Sydney. It’s generally accepted that 5000 sqm is the optimal size of an urban facility, because it’s the sweet spot between the likelihood of maximum occupancy, and the size required to benefit from economies of scale with respect to operating costs, especially wages. In other words, a facility larger than 5000 sqm runs the risk of higher vacancy rates, and in a facility smaller than 5000 sqm, each unit carries a higher operating cost.

That doesn’t mean that smaller facilities can’t be profitable.

The property and public policy consulting firm Urbis provide an excellent research and consulting service for intending self-storage owners. In their 2019 report, they confirmed that the average gross income per gross sqm was $454 in Sydney and around $351 in Melbourne and $298 sqm in Brisbane, with an average occupancy of around 80% nationwide.

These figures are an excellent gauge for comparison and reveal that this facility is about half the optimal size, with rental levels at about half the average rate which could potentially be achieved. Nevertheless, it is a long-established, family-owned facility with minimal advertising expenses. Doubling the size of this facility would be optimal.

While increasing the average rental would be possible, it would mean a substantial increase in advertising, marketing and discounting. The Sydney self-storage market is highly competitive, and there are no guarantees that, despite this increased expenditure, nearby facilities would not drop their prices and enter into a discount war.

It is worth keeping this in mind.

As a comparison, below is an example of the figures behind a larger facility, in regional Queensland. The gross area is almost four times larger than the above example, and the net area is more than doubled. The difference in storage units, though—293 compared with 220 above—isn’t so striking. The occupancy rate is the same, but the gross income is substantially less. This is to be expected when comparing a regional area with inner Sydney.

Customers are increasing demanding contactless transactions, and there are numerous ways self-storage operators can automate move-ins. Using a purpose-design app, a storers can simply enter their password into their smart device’s keypad and Viola! Open sesame! This initiates a Bluetooth-enabled electronic lock and total access control system. It also includes digital key sharing, where storers can grant temporary unit access to a friend, family member or anyone who needs to grab an item from the storage unit. which also simplifies managing access for customers in arrears.

On-line bookings and web-based transactions are another option to enable contactless move-ins. Storers are able to pay and book on-line, with contracts signed using digital signatures. Also, fast banking facilitates transfer of the payment straight away. Locks can be controlled by the on-site manager via a management program. At any time, the manager can open or close these locks at her discretion.

Similarly, remote office management software allows the manager to not be physically present at the facility and will allow you to operate your facility without an onsite office. A complete cloud-based remote operation system will streamline billing and account management and debt control from anywhere with a computer and internet access.

Robotic automation in warehousing and on-line retailing has been around for years. Recently robotics have been installed in newly built self-storage facility in Singapore. This system is the size and shape of home robot vacuum, yet it picks up storage boxes and delivers them to the collect and dispatch area. The manufactures promise improved efficiency in use of floor space and improved hygiene—the entire move-in and collection process is contactless.

With their extensive uninhibited roof top space, self-storage facilities are well suited to solar energy generation and increasingly operators are choosing to offset power costs and generate income by installing solar panels.

The ultimate benefit of this is to add value to the facility when it comes time to have it valued or sold.

Depending upon the facility’s location, solar energy companies can lease the roof space, giving the facility an extra rent-payer. There are also generous installation subsidies available from governments, giving self-storage owners a compelling business case to consider.

Fort Knox Victoria certainly thought so—they are undertaking a massive upgrade to their solar infrastructure, along with Kennards and National.

Please contact us for any further information or referral to any of the suppliers or manufacturers mentioned above.