Australian Self Storage Investment Market
The self-storage sector has solid investment fundamentals
- Investor demand for self-storage facilities was strong during the 2020 financial year, with the underlying investment fundamentals for the sector remaining solid, albeit with softer rental growth projections.
- According to their latest investor reports, National Storage REIT acquired 19 new self-storage centres and Abacus acquired 11 new storage assets across Australia during the 2020 financial year. Both groups also note their strong development pipelines, including the expansion of existing centres, new developments and planned renovations.
- The industry has undergone considerable consolidation during recent years due to a number of factors, including: bank funding favouring larger operators who offer economies of scale and diversification of geographic and rental risk; the cost of new greenfield developments being too high for small operators; and the cost and skill involved in converting existing commercial buildings to self-storage facilities.
- Whilst major operators reported a dip in occupancy during the acute phase of COVID-19, they are now reporting occupancy rates of similar to pre-COVID-19 levels.
Yields compressed further during the year to June 2020
- Self-storage values are highly dependent on the facility’s catchment and management’s ability to find a suitable pricing equilibrium.
- The larger operators (and purchasers) are seeking and comparing assets nation-wide, with yields reflective of location-based market attributes, with stronger yields in Sydney and Melbourne. Secondary markets (such as Perth and regional centres) continue to reflect a yield discount, however as the markets mature, the gap continues to narrow.
- Demand for high-quality assets above $5 million remains strong. There is been a decreasing spread for core and secondary asset yields, largely a result of the scarcity of core assets available for acquisition. Properties have been trading in a narrower yield spread during the past five years when compared with the previous five-year period.
- The average rate per storage unit increased from $19,135 during the 2019 financial year to $22,152 during the 2020 financial year, due to growth in the average unit rental rates and tightening yields.
- Our analysis shows that during the year to June 2020, equated market yields averaged 6.68%, tightening from 7.19% during the previous 12-month period. Our analysis includes prime and secondary assets. The tightening in yields largely occurred during the second half of 2019, with COVID-19 conditions currently limiting further yield compression.
- The average internal rate of return (IRR) was 10.09% during the year to June 2020, tightening from 11.12% for the previous year.
Investment demand is expected to remain strong
- The effect of COVID-19 on the self-storage market is expected to be relatively mild long-term in comparison to the wider property market.
- The self-storage industry is likely to benefit from existing storage contracts requiring prepayment typically a month) in advance, automatic payment options, as well as the potential for storage demand as a result of dwelling downsizing or business closures throughout Australia on the back of reduced population movement and rising unemployment. Furthermore, demand from businesses is reported to have increased due to growth in online retailing during the COVID-19 period to date. Naturally, there are also downward pressures on demand including less movement internationally and interstate. However, the impact on demand is very much location specific.
- Whilst smaller investors are likely to delay investment decisions due to current uncertainty and volatile consumer and business sentiment, larger investors have remained active in the self-storage market during the COVID-19 period to date and this is expected to continue.
- To date in 2020, yields have remained at similar levels to the end of 2019. Yields are expected to stay this level over the near term, with the potential for tightening towards the end of the financial year. However, this will depend on the length of COVID-19 restrictions.
- The difference between yields and IRRs is expected to narrow on the back of softer rental growth forecasts.
- The self storage sector has performed well during the
COVID-19 pandemic, relative to other property sectors. This is likely to strengthen the investment appeal of the sector going forward.