While listed property in the United States and United Kingdom has been among the worst hit by the global credit and liquidity crisis, the South African property market has managed to reasonably weather the financial storm. The main reasons are the local commercial-property market was not supported by securitized loans to any significant extent; and the S.A. banking system, due to exchange controls, had reduced exposure to the U.S. subprime market.
Nevertheless, the crisis has had significant consequences for the S.A. economy. There has been a natural aversion for riskier emerging markets such as South Africa, resulting in lower capital inflow and reduced trade. There has also been a re-rating of credit risk (four of South Africa’s top five banking groups have foreign ownership), creating more challenges for businesses looking to secure loans. In recent months, the local economy has slipped into a recession, with consequences for self-storage.
A Fragmented Market
The S.A. self-storage sector remains highly fragmented, and recent market turmoil could have the effect of hastening the first round of consolidation or hindering its progress. Depressed market conditions mean there is less capital to support an attempt to take the industry through an initial consolidation. However, the distressed trading environment will also present the opportunity for an established operator with the correct business model and platforms to acquire facilities that are struggling due to their own inefficiencies.
These factors are important when trying to understand the dynamics of the S.A. industry. There are approximately 200 self-storage facilities in South Africa. The largest operator owns five stores, and there are less than 10 operators owning between three and five stores. There are currently only four operators who own stores in more than one city. As a result, there is little information in the public domain about the sector in general and, more specifically, the trading history in the sector over the past 12 months.
Other factors indicating a fragmented and young market are the types of facilities that are operational and being built. Overall, the market is still dominated by first- and second-generation facilities, typically ground-floor units representing rows of garages with little in the way of service. The average unit size in South Africa is close to 18 square meters (approximately 180 square feet), which is significantly larger than international markets.
Of late, more third-generation stores are being developed. While on the increase, multi-story facilities still only comprise a minority share of the market. Conversions represent less than 5 percent of the market, and the quality of the initial conversions was low. In recent years, quality conversions of older buildings in prime locations have taken advantage of steel-hallway systems.
The S.A. economy generally lags first-world economies by a period of six to eight months. Because of this, self-storage performance continued to be robust through the summer months, September 2008 to March 2009. In April, consumer demand dropped in the overall retail market, coinciding with the seasonally slower time of year.
In this regard, the S.A. market likely has been no different than any other international market in that there was a decrease in the number of inquiries, customers became more price sensitive, and there was an overall adjustment in the domestic and commercial user base, with users being driven by negative rather than positive events. A natural consequence of these market conditions was customers struggling to keep up with monthly payments, and the increase of bad debt.
Another outcome has been a natural slowdown in the rate of new development. During the boom years of 2005 to 2008, the industry was growing by approximately 40 percent year-on-year. That rate of growth has fallen significantly.
Despite tough economic trading conditions, the growth in gated-security estates and high-cost, smaller dwellings with little or no storage space, and the rapid urbanization of previously disadvantaged communities is still driving the industry forward. South Africa also has a unique situation in which it has an unusually high number of expat, middle-class citizens working in foreign destinations. These expats typically still have one foot firmly planted in South Africa, with their personal belongings safely stored for their return.
Customers who use self-storage today generally do so because they have a need for the product, rather than it being a lifestyle choice. Consequently, there is still a large untapped market, as there is little public awareness of the true benefits of self-storage.
The user profile is changing somewhat. The domestic user base was once dominated by those in short-term need due to a home renovation or moving to a bigger house, an overseas work assignment or the like. Now renters include the domestic user who has been forced to move into a smaller home or lost a job.
The commercial sector, primarily driven by the small- to medium-size operator, has seen a similar trend. Businesses that were previously looking for additional space are now looking to store goods while they relocate to smaller premises.
In both the domestic and commercial market, the customer is more price conscious and will look for the best deal. He will also ensure he does not rent surplus space, taking the time to pack, stack and store items to maximum effect. To counter such trends, the more sophisticated operators have reacted accordingly, offering specialized pricing and discount structures, transportation, and other value-added services and products.
The S.A. self-storage industry is continuing to grow; however, the impact of the current market cycle could mean a number of first- and second-generation facilities will fall by the wayside completely or be acquired by stronger operators. A number of facilities that close shop will be stores with unprofessional setups, or where self-storage hasn’t been the sole or main business activity of the entrepreneur.
Gavin Lucas is the founder and CEO of SASSI Self Storage Group in Cape Town, South Africa. The company has a portfolio of seven S.A. self-storage facilities under the brand name Stor-Age Self Storage. Mr. Lucas is a qualified chartered accountant and previously worked for KPMG. For more information, visit www.saselfstorageinvestments.com.