National Self Storage Update
Downward pressure continues to be placed on yields for Self Storage assets
- Sydney and Melbourne are the strongest investment markets for self-storage. Investment demand remains strong and yields continued to tighten over the 2019 financial year.
- Equated market yields tightened by circa 230 basis points between the 2014 financial year and the 2019 financial year.
- Centre occupancies have fallen over the past three years as a result of softer economic conditions and to a lesser extent, increased competition in some locales.
- The industry is likely to face several headwinds over the short- to medium-term – including growth in the peer-to-peer market (i.e. storing goods in other people’s spare rooms, sheds etcetera), growth in work-store supply (which might impinge on demand from large storage users) and new supply putting pressure on revenue in some locations.
- However, positive drivers of demand going forward include population growth, growth in online retailing, increased mobility of students and workers, continued urbanisation and expected improvements in the residential market, particularly in the number of housing transfers (i.e. people moving houses).
The Evolution of the Storage Industry
The self-storage industry has grown substantially over the past decade. From June 2009 to June 2019, the number of self-storage facilities nationwide has risen by an estimated 12.83% (IBISWorld). Industry growth has been driven by rising customer awareness, urbanisation, strength in the residential market and growth in demand from businesses. Furthermore, until recently, there have been limited feasible alternatives to self-storage for individuals or businesses with storage needs.
In addition to growing, the self-storage industry has also evolved considerably over the past two decades. Self-storage facilities have evolved from being located on large,
sprawling sites in outer locations, often with poor access
and visibility, to being modern facilities, often multi-level, on high-profile sites such as main roads in inner locations.
The higher-profile location of many new facilities has partly contributed to rising consumer awareness of the industry however, another key contributing factor is the digitalisation of marketing which has enabled centres in lower-profile locations to reach target markets through digital streams.
Individuals are the primary customer of self-storage facilities. According to IBISWorld, revenue derived from individuals accounts for 63.1% of total self-storage industry revenue. Business customers account for the remaining 39.6% of industry revenue (IBISWorld). Revenue from businesses has grown as a share of the total revenue of the past five years, predominantly due to growth in the online retail sector.
What are the key drivers of self-storage demand?
The key drivers of customer demand for self-storage are displayed below.
How are these drivers performing?
Sources: ABS, HIA, NAB, IBISWorld, Australian Government Dept. of Education and Training, m3property Research
Sydney and Melbourne are leading the investment market
The self-storage industry is highly fragmented and comprises a large number of small and mid-sized players. There are a small number of large national chains, with most operators being single-location businesses owned by individuals. Because of this, the industry operates in two tiers.
Self-storage values are highly dependent on the facility’s catchment and management’s ability to find a suitable pricing equilibrium. There is strong demand for high-quality assets above the $5,000,000 price point.
The investment market continues to be driven by Sydney and Melbourne, in line with population growth figures. Melbourne has decreased the population gap to Sydney, which is starting to be reflected in lower adjustments in capitalisation rates based on the respective macro locations. Brisbane remains the third-strongest investment market in Australia, with the population growth in Tasmania putting the adjustment in Hobart for the macro location to be in line with Adelaide. Adjustments for non-Capital City metropolitan areas are currently approximately 100 basis points. The adjacent map shows typical capitalisation rate adjustments relative to Sydney (the tightest market).
Yields continue to tighten
During the 2019 financial year, the average equated market yield was 7.47%, having tightened 30 basis points from the 2018 financial year. The average initial yield was 6.69%. The average rate per self-storage unit was $18,787, down 7.6% from $20,325 during the 2018 financial year however up 38.03% from the 2014 financial year.
The average equated market yield tightened circa 230 basis points over the five years from the 2014 financial year to the 2019 financial year. Yield compression can be, at least in part, attributed to the ongoing increasing awareness and maturity of the self-storage market, but also the general economic conditions, low financing costs and increased demand from corporate purchasers.
m3property has also noticed that there is a decreasing premium being applied between Prime and Secondary assets, likely to be largely attributable to the scarcity of Prime assets being available for acquisition. Since 2012, initial yields have averaged 102 basis points higher than equated market yields.
The word ‘disruption’ is now a somewhat common part of the real estate industry. Co-working, online retailing, artificial intelligence and electric vehicles are some examples of current and growing ‘industry disruptors’. Within the self-storage sector, disruption is emerging in three key forms, outlined below:
Warehouse or work-store units: Warehouse/work-store units are generally sized between 50 square metres and 150 square metres. Because of this, they could potentially compete for customers with large storage requirements who may occupy multiple units in a storage facility.
Peer to peer marketplace: The peer-to-peer marketplace has grown rapidly over the past five years. Uber, Airbnb, Airtasker and Parkhound are examples of peer-to-peer operators. In the storage industry, Spacer was launched in 2015 and provides an alternative to traditional self-storage in Australia. Spacer allows people to rent out their underutilised space (for example parking spaces, bedrooms, garage, backyards, sheds et cetera) and is currently operating in Adelaide, Brisbane, Canberra, Gold Coast, Hobart, Melbourne, Perth and Sydney. From a customer perspective, Spacer is often more affordable and more flexible relative to traditional self-storage. In 2017, National Storage began a partnership with Spacer by acquiring a 25.8% stake in the business.
Mobile storage: Mobile storage is another potential disruptor to the self-storage market. Mobile storage includes storage that is stored both at dwellings or packed and then stored offsite. Mobile storage has a number of barriers to entry, including high transport costs, high overheads when commencing, related third-party insurance issues and council issues with storing mobile boxes on the footpaths.
A comment to make about the above-discussed alternatives to traditional self-storage is that whilst they have a growing presence in capital cities / major cities, smaller regional locations may not have as readily available access to these alternative forms of storage.
Furthermore, they typically do not offer the same convenience or security to customers as traditional self-storage, of which a good portion now offer 24 hour/7 day customer access and digital CCTV footage. Whilst difficult to quantify, it is prudent to note that small older centres that do not offer the convenience or security that new centres typically include may be more susceptible to loss in patronage if monthly rates are not competitive with the alternative forms of storage noted previously.
The outlook is positive
Demand for self-storage is expected to increase over the short- to medium-term. Demographic, socioeconomic and residential drivers are all expected to drive demand from individual users going forward. Other factors such as growth in online retailing and the number of SMEs are also expected to result in increased storage needs from business customers.
However, despite the demand outlook being positive, we expect that occupancy rates in some facilities could come under pressure due to the overdevelopment of storage facilities in some locations. Furthermore, competition in the industry is becoming increasingly price focussed. These factors have the potential to result in an increase in discounting or incentives offered to customers.
Mobile storage and peer-to-peer storage options are expected to gain further market share going forward. However, major storage operators are anticipated to continue to increase their focus on convenience, security and the provision of value-add and specialised services.
Other trends we expect to continue/develop are:
- As environmental awareness and ‘green’ initiatives continue to grow in the corporate sphere, business customers are expected to increasingly reduce their requirements for document storage. This is already a trend that has grown over recent years.
- Self-storage centres are expected to increasingly offer goods collection/parcel pick-up as an ancillary service. This is another trend that has developed over the past two years and is expected to continue given continued growth in e-commerce.
- New development is likely to continue to take the form of multi-level centres. New development is increasingly located in inner and middle-ring metro locations where large parcels of land are scarce as well as expensive. This has encouraged developers to build upwards during recent years and this trend is expected to continue.
- In the investment market, we expect that yields have room for some further tightening over the short-term. We then expect that yields will remain at a low level for the medium-term. Our forecast takes into consideration forecasts for employment and population growth, retail sales, house prices, house transfers and bond rates.