European Self-Storage Faces Financing Challenges

Richard Fox and Bill Lax Comments
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One of us was recently invited by a top firm of London property advisers to spend a day sailing in the Southampton waters. Fellow guests included representatives of some of the leading U.K. property institutions as well as some distinguished commercial surveyors. During the course of the day, the author casually introduced the topic of self-storage in the United Kingdom to discussion. It was without much success. The conversation tailed off after a couple of noncommittal sentences, leaving the author feeling about as good as if he had just introduced himself as newly arrived from outer space.

The point of this story is, despite the vigorous growth of self-storage in the United Kingdom and Europe over the last three years, the attention the industry commands in financial circles is still quite limited. This can be a major obstacle to those wishing to raise financing for self-storage projects, particularly new entrants to the market.

Money Woes

Given this lack of familiarity among many financial institutions, it is significant that the l eading U.K. self-storage companies have tended to either be backed by U.S. funding or are part of U.S. self-storage majors such as Shurgard. For example, The Big Yellow was funded within a year of setting up by Prudential Insurance Co. of America. Safestore is backed by the Soros Property Fund, and Access has GE Capital as a major shareholder. Encouragingly, it is also true self-storage companies with U.K. stock-market quotations have attracted the interest of certain leading U.K. investment institutions.

Raising financing for self-storage projects in the United Kingdom can be frustrating. Many banks are not familiar with the dynamics of the industry and its exciting growth opportunities. In the United States, there is self-storage capacity equivalent to 4 square feet per capita. In the United Kingdom, the per capita rate is 0.1 percent of the U.S. figure. In Europe, capacity is even less. In short, there is quite a bit of work to do and funding to raise if the United Kingdom and Europe are to come close to matching the United States in this industry.

Overcoming Caution

The issue is to overcome the caution of the U.K. financial sector. Confidence in the financial community will grow for a number of reasons. It is clear the new breed of self-storage facility, well publicized and sited, is attracting significant levels of business. Many new sites are 90 percent full within 12 months of opening. This message needs to be communicated to the financial community to overcome the concern self-storage facilities are empty upon opening.

Furthermore, while property costs may be higher, the returns available in the United Kingdom and Europe are greater than in the United States. Most of the costs of a self- storage operation are fixed—namely rates, staff and utilities. Facilities should break even at an occupancy of around 45 percent; once this is achieved, sales are almost equivalent to profit, available to service debt, and provide a return for investors. Given the infancy of the industry in the United Kingdom and Europe, there are no signs of competition on self- storage rates.

Subject to correct site selection and keeping to the construction budget and timetable, a self-storage investment should be successful. Certainly, it is not a complex business to manage, although high levels of service are essential.

Successful Financing

How should one set about raising financing for a self-storage project? The two most important ingredients are the quality of the team and the business plan.

The team should be well-rounded in terms of skills. These include site selection and property acquisition, construction, marketing, operations and finance. Evidence of strong commercial experience is important, and a track record in self- storage obviously helps, but is not a prerequisite.

The business plan should be clear, simple and to the point. Self-storage is not like splitting the atom. The plan should describe the project, the management team, the market for self-storage (national and local), and describe the risks and rewards of the investment being sought. It is crucial the plan contain detailed financial projections and the key assumptions underlying them. Too often, projections look fine to the casual observer, but credibility is eroded by poorly conceived assumptions.

For example, are the lease costs on the building for the facility achievable? Have you included all the up-front costs, such as legal and property-advisory fees? Do the construction costs stand up to detailed examination? Have you allowed enough contingency for cost and time overruns, and increases in interest rates? In short, the business plan is vital. You are asking a bank or investor to support your project. Why should they do so if your plan is full of holes or is poorly thought out?

With the plan completed, the next step is to approach the financial markets. If you have some of your own money to invest, this will clearly help, as this demonstrates the commitment of the project's sponsor and lessens the need for external finance.

The size of the financial requirement will depend on whether a freehold or leasehold property is sought. While a leasehold property may be cheaper for a startup venture, the landlord is likely to require significant personal guarantees or a rent deposit until the business has achieved a solid profit record. Even with a leasehold project, it is likely funding between £750,000 to £1 million will be necessary. Banks and business angels (including family members) are the most likely source of funds at these levels. Most venture capitalists prefer larger deals and are averse to startups.

The fund-raising process can be lengthy, dispiriting and subject to pitfalls. Generally, persistence and good preparation are rewarded, although there are no guarantees. Searching as widely as possible makes sense in a prudent funding structure. No bank will lend 100 percent of the project cost.

There is plenty of scope for the recent growth to continue in the United Kingdom and Europe. Self-storage need not be the preserve of just the major companies in the sector, there should be room for the smaller player that is well run or serving a market niche.

Richard Fox is an independent corporate adviser based in London. He was an investment banking director at NatWest Markets and is a qualified lawyer. For more information, e-mail richardfox1@btopenworld.com.

Bill Lax is a qualified chartered accountant based in Gloucestershire, England. Mr. Lax has worked as group financial director for a number of mid-size companies. He now advises on individual corporate projects. For more information, e-mailwjlax@aol.com.

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