I recently spent four pleasant days in New York, meeting U.S. institutional investors, analysts, traders and investment bankers interested in the U.K. self-storage market. The trip was a follow-up to interest expressed by U.S. investors, who are looking for a fresh way to improve their ROI. The reasons for their interest are clear:
- While the U.S. market is still growing and consolidating, investors and operators desire faster growth.
- Investors are worried about potential weakness in the U.S. dollar and are keen for GBP earnings exposure.
- Because U.S. REITs have performed so well in recent years, big investors are looking to set up large international funds.
- The U.K. government is likely to introduce a REIT structure in 2006.
- There are only a few established self-storage players in the United Kingdom.
The U.K. market is significantly less mature than that of the U.S., being some 15 years behind in its development and awareness. But it is growing at a compound rate of 20 percent per year. Though the United Kingdom has a smaller population than the United States, its people are crammed into a great deal less space This, in part, explains why the United Kingdom has higher property prices.
Given its shortage of space and high population, you would think the United Kingdom requires lots of storage. Surprisingly, this is not the case. In fact, the market is underdeveloped and most people don’t yet know it exists. The country has only 570 storage centers nationwide, offering just 0.27 square feet per capita relative to the 38,817 stores that offer 4.5 square feet per capita in the States. The potential for expansion is vast.
“Even if you factor in only one-third of the per-capita levels seen in the United States, the United Kingdom offers enormous growth,” says Nick Spoliar, a self-storage analyst with RW Baird in London. “This is why the U.K. is an attractive target for U.S. businesses looking for growth.”
The cash-generative nature of self-storage drives U.K. interest in this sector. Cash flow is predictable, stable and is highly visible. Revenue from established stores helps finance the acquisition of new ones, and banks are always interested in high-cash businesses, particularly when they are backed by assets.
U.K. banks are increasingly interested in lending to self-storage, and the development of a more U.S.-style valuation model is giving them confidence to lend more aggressively. This is likely to create more liquidity in individual assets, as well as increase the marketability of the companies themselves. U.K. storage businesses will have ample opportunity to leverage their cash flow and asset base to invest in more growth—a compelling situation for U.K. investors.
Due to high property and rental prices in the United Kingdom, many businesses use self-storage. In fact, about 37 percent of U.K. self-storage revenue comes from the commercial sector. These business customers rent more space and store longer than households, so each one is worth five times as much as a residential customer. The higher business use adds greater stability to the U.K. self-storage market.
“U.K. businesses are always looking to cut costs, and self-storage is an opportunity to reduce variable costs, given the expense of storing goods at their own premises,” Spoliar says. “This is a constant dynamic in the market and has two positive effects: It gives the U.K. businesses a revenue and profit upside, and it significantly reduces cyclicality.”
Barriers to Entry
The top five players in U.K. self-storage command 40 percent to 50 percent of the market, whereas in the United States, the top 10 companies command only 11.5 percent of the market. The trend is expected to continue as the U.K. market grows, though some might expect more diversification of the market. What gives?
The explanation lies in tight U.K. real estate, characterized by competing uses for land and complicated town-planning processes. These factors not only drive business and customer demand for self-storage, they ensure entrants to the industry have difficulty finding new sites. Existing large operators with specialist teams can devote the resources required to locate and open new stores. Newcomers find it hard to compete.
Because many U.K. property investors have been taken private and offshore in recent years, the Treasury is concerned with creating more liquidity in the market and bringing ownership back home. Therefore, it’s high time to introduce a REIT structure to the United Kingdom. When recently introduced into other markets, REITs have proved very successful, and self-storage is highly eligible.
“The likely advent of REITs has already changed investors’ perceptions of the property market in a positive way, and it is very likely this process has farther to run,” Spoliar says. The success of the U.S. sector is indicative of how the market may evolve in the United Kingdom.
I returned from New York very encouraged by the opportunities we will have as the U.K. market matures. The potential may even be greater than that of the United States, due to population density and pressure on efficient use of property assets. I’ve learned a lot from U.S. investors, and welcome any visitors interested in our fast-growing market across the sea.
Andrew Jacobs is the CEO of Lok’nStore Group PLC, one of only two quoted self-storage companies in the United Kingdom. Lok’nStore is the fourth-largest operator in the country, with an approximate 5 percent market-share. Mercury Real Estate, a U.S.- based property investor, recently became Lok’nStore’s second-largest shareholder, with a 10.4 percent stake in the business. For more information, visit www.loknstore.co.uk.