Determining Self-Storage Value in Europe

Tim Edghill and Chris Stevens Comments
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Self-storage is increasingly considered an investment-grade sub-sector in the European market, thanks to industry growth and the success of the major operators. The business is fundamentally a retail operation that is closely aligned to the real estate from which it operates. This relationship has been recognized by the broad range of investors who have tried to gain access to the self-storage market in the last 12 months, seeking to align themselves with more profitable operator income vs. conventional property returns.

Recent evidence has shown that storage operators are prepared to pay more for a well-located site than traditional investors and developers of industrial real estate. This demonstrates an ability to achieve a sufficient return on capital to cover costs. Any over-payment for land is made on the presumption that a storage operation will generate greater cash flow than conventional businesses, particularly once occupancy has stabilized and created a greater value as a real estate investment.

Performance

In recent years, property has delivered strong investment performance against other asset classes. The occupational basis of the storage business means its performance is linked to that of the wider real estate market. Total returns in the U.K. property sector have slowed in 2007, but previously, there had been continual downward pressure on yields. For self-storage businesses and investors, this meant a higher entry price and greater competition for well-located properties.

In recent years, we’ve seen significant capital flowing into the U.K. commercial real estate market from local and foreign investors. This has served to increase competition for assets and further depress yields. It was not until investors began to question forecast returns early in 2007 that this changed, compounding the recent turmoil in the U.S. sub-prime mortgage market and ensuing “credit crunch” and, as a result, re-pricing.

The U.K. self-storage market should not be affected by the slowdown in the real estate market (though falling real estate prices will be welcomed by operators). Over recent years, storage properties have outperformed others and sustained returns. Management teams have been able to actively manage assets to achieve maximum occupancy and rental rates.

Management

The result of the growing awareness of self-storage is it is gaining momentum with investors. Where traditional real estate assets have re-priced against void risk, self-storage businesses continue to thrive, benefiting from the opportunity and cash flow generated by risk management.

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