This is a good story about increasing interest rates and a compelling proposal we recently put to a self-storage owner operator.

So, on the one hand we have fund manager who is wanting to acquire existing self-storage facilities, and the other, a Sydney Metro self-storage owner operator of ten trading sites. The fund manager, tells us, he wants to buy these facilities and fractionise or syndicate it to co-investors. All good so far.

We are delighted that this fund manager wants to do this as we reckon there is absolute demand from fractional co-investors to buy into a self-storage facility, but there is a major hurdle to overcome in order to make it palatable for smaller investors… and we’ll get to that shortly.

Firstly, how do we know that fractional co-investors want to invest into self-storage?. Well, according to our website analytics, the number one reason why people come to our company’s web site, is that they wish to invest in self-storage. Yes, they google search “self-storage investment” and viola!..our website appears., along with many others of course.

This search question, totally out performs any other search incoming into our website….. This is amazing to us, as over the last decade or so we have offered shopping centres, warehouses and office blocks and yet self-storage facilities have been only offered on rare occasions, but despite that, …..that search question, remains our number #1.

But, there was a hurdle.. When another fund manager did offer a self-storage facility as a fractional investment he did receive the many investor enquiries as expected however, investors rejected the investment for one particular reason which no one predicted. It wasn’t the return, it definitely wasn’t the investment category being self-storage either. Nope, they rejected the fact that a modern self-storage facility does not, have any long term leases to its customers. Yes, instead of a lease, the storer’s” sign a monthly license agreement. This means storers can come and go on a month-to-month basis.

Intending, fractional co-Investors didn’t like that. They wanted the security of long-terms leases in their investment. In other words,  investors, saw the investment into the modern facility more akin to an investment in a “business” which could mean a threat to the regular, reliable income that they were seeking. Never mind the fact that a self-storage facility has one of the most secure reliable incomes of all assets. But, that is what investor’s decided,  they weren’t prepared to invest on the returns offered which were similar to other ordinary commercial property investments.

However, this current fund manager has a plan to overcome this objection with an interesting proposal to the seller.

Ordinarily, the fund manager buys investment property, fractionises the property to 40 or so individual investors and holds the property in a fund for around 7-10 years. At the end of the term, the property is sold and the fund is wound up and the investors receive back their original investment with hopefully some capital gain. Along the way, the investors receive income distribution relative to their investment. On most properties this has been around 7% pa or so.

And here is the proposal put to this particular self-storage owner.

In order to overcome the investor rejection to having no lease, the fund managers have offered the self-storage owner that he takes a leaseback over the property portfolio after the property settles. In other words, he asks the self-storage owner to guarantee the rent from the self-storage facilities over the fund term of  7 years. And, in addtion to that….At the end of the fund term the existing self-storage owner has the exclusive right for period, to purchase the property back from the fund manager at valuation.

You may ask why a self-storage owner would do this as he could easily just sell the facility outright to an ordinary self-storage buyer at any time.

Well, the answer to that, is firstly this self-storage owner knows that, the rent that he will pay today, will be eclipsed by the self-storage facilities turnover in a short amount of time, giving him a hefty cashflow surplus. Secondly, he will pocket today the proceeds of the sale of the property immediately, giving him ample financial horsepower to increase the income from that property or alternatively free up equity to keep building his other self-storage businesses, with the comfort of knowing that, one day he can buy it back.

He also knows that if he went along to a bank he could only access a portion of his equity in this property, and the interest rate would be similar to the % rent that he will pay on the loan at 50% LVR. Whereas in this proposal,  he gets to access 100% of it. He also knows that the main game at the moment is to expand his business as storage demand has out shined anytime he has ever experienced with the comfort of knowing that he will be able to amalgamate the freehold and business together down the track.  In the meantime, his intention is to double the number of sites that has.

And, back to the fund manager. He’s delighted, as he has a ordinary lease back to the self-storage operator and this means his investors will be happy as well. So from here he will be ready to setup a trust to fractionise to enable co-investment.

Anyway, we are keen, to help you either sell,  establish or initiate more self-storage facilities. Please don’t hesitate to check out our vacant sites for storage page here . Otherwise look out for new investments including self-storage facilitie going concerns here or of course please reach out to me at any time on rob@boxcom.com.au

March 2023