Kennards is the largest operator in Australia. This three-story Port Melbourne facility, built from the ground up for self-storage, has more than 1,000 units.
No question about it, self-storage in Australasia will grow like a King Kong koala in the coming year. Economic returns have settled somewhat, but the industry is still widely viewed as an attractive investment. Occupancy rates remain in the 80 percent to 90 percent range, considered ideal by most operators, and supply is meeting demand overall.
Back in the late 90s, the market had suffered from an influx of facilities, mostly retrofitted factories and warehouses. The trend has eased, with a jump in self-storage popularity helping to correct the imbalance; still, operators in some locales continue to struggle with overbuilding and discounting. Its a problem that isnt likely to disappear as long as investors rush into self-storage without researching the industrys realities.
Already hale and hearty, the Australasia markets growth potential is tremendous. Only 3 percent of the population uses self-storage and 75 percent of Australians have never tried it, according to recent research by the Self-Storage Association of Australasia (SSAA). Most nonusers dont fully understand the product and services, which indicates the industry has considerable room to expand. The challenge will be in educating the public about how self-storage will benefit them.
To empower future marketing, the SSAA is conducting a detailed study to build on previous research. Rather than focusing only on existing and past customers, pollsters will profile those who have yet to try self-storage. A close look at nonusers will reveal a truer picture of the untapped market, and how it perceives self-storage costs and benefits. Results will be unveiled at the SSAA convention and tradeshow, Oct. 4-6, at the Marriott Hotel, Gold Coast.
Koala Self Storage has two sites in Perth, Western Australia. Sloping block construction allows drive-up access to all three levels.
Property Trust Impact
As the industry grew and matured, it attracted intensified interest from institutional investors and the property market. In 2005, a heavyweight property trust entered the self-storage marketAbacus Property Group in conjunction with Storage King. This means the top-three self-storage businesses in the region (Kennards, National Storage and Storage King) are all aligned with property trusts.
National Storage started the process in late 2003, creating a relationship with APN Funds Management. Kennards followed suit in 2004 with the purchase of the Millers portfolio in conjunction with Valad Property Group, making it the largest provider of storage in Australasia.
The effect of property trusts on the market has been considerable. With more industry investors, pressure has increased on facility operators to perform. Some would say returns forecasts are unrealistically high, although they have generally been met. With large and small family institutional investors scrutinizing the inner workings of large businesses, facilities have less flexibility to ride out slumps.
Even the slightest deviations from expected results are questioned. As a result, facility managers must ensure their stores are continually running at optimal performance, heightening the importance of quality staff.
Other investment opportunities into self-storage have increased in the past 20 months, including the sale of individual strata-titled units within a facility. This allows developers to sell separate self storage units to potential investorsoften off the planthus raising funds to develop the site and turn a tidy profit. Unit owners then pay a management fee to have their units rented, and receive profits from their rentals.
This controversial method of financing a self-storage development is generally marketed at smaller investors, who are promised a real estate investment for only a few thousand dollars. One of the largest facilities in Australia was opened in North Queensland just prior to Christmas, entirely strata titled.
The arrangement is perfect for owner occupiers, particularly commercial clients, tradesman and the like, who can own their own unit rather than continually pay rent for one. As an investment strategy, though, care must be taken on several fronts: actual rental returns on the unit; quality and cost of facility management services; and the potential re-sale market for the unit if you need an exit strategy.
Developers offering rental guarantees for a short period further complicate these issues. Guarantees are used to hook investors, promising returns of 9 percent or more for a fixed term. The rental guarantee can increase the purchase price by thousands of dollars, particularly if the investor is basing the figures on growing this return in the future. If realistic returns are, say, 7 percent, the developer pays the extra rent for the period of the guaranteeand still comes out ahead due to a higher purchase price.
Of particular concern is the developer interested only in building more storage centers, and not actually managing them afterward. Similar rent guarantees have been used in Australia to artificially increase the value of residential housing developments, usually in major urban areas. Developers benefit, but investors get in troublemany must move into their investment property once rental guarantees expire and real returns emerge.
Storage units marketed as an affordable way to enter the property market appeal to many family investors, and they dont tend to be as stringent with their research. Negative publicity from small guys losing big in self-storage could harm the industry as a whole. The SSAA will monitor this issue closely over the next few years. Already, its lobbying the government for more regulatory control over property developers promising unrealistic investment returns.
Midlands Self Storage is a 60-unit facility in regional Tasmania. Designers incorporated colored steel and gabled roofline to echo the architectural heritage of the old farming community.
Throughout most of 2005, real estate prices continued to rise, making it difficult for developers to find new sites. The market appears to have turned in the last few months, particularly in the Sydney area. But last years high real estate prices, escalating construction costs, and opportunities for acquisitions under the property trusts led to an unprecedented level of facility sales.
Major operators National Storage and Storage King, with the backing of their respective property trusts, have acquired many facilities across the country. National recently bought four properties in Perth, making it the only operator with a presence in all the mainland capital cities. Up until 2003, few significant facilities had sold within Australasia; then, in 2005, the number of traded stores within capital cities equaled that of new ones opened. Fierce competition for established sites has seen yields for self-storage drop from around 11 percent to 9 percentand below, in some cases. Only time will tell if this is sustainable.
Also, for the first time, prospective buyers are eyeing immature sites, willing to bank on their own skills to expand and fill units. Major operators arent the only ones on the acquisition trail. A number of local operators are looking to strengthen presence within their respective corners. Even in the country areas, where large operators have yet to enter, facility owners crave acquisitions so they can run a network in the region, gaining efficiencies in advertising and other administrative costs.
Trends and New Ideas
Despite all the industry consolidation, new investors continue to enter the market and existing facilities keep expanding. While self-storage growth has waned somewhat, dropping from its zenith of 15 percent to around 8 percent last year, a number of significant facilities are now under development. Strong growth is evident in regional areas and outer-metropolitan districts. As real estate prices ease, more sites should become feasible for self-storage.
Recently, more consideration is being given to multiuse sites, a tactic yet to take off in Australasia. Developers are investigating self-storage facilities combined with car washes, take-away food establishments and major shopping complexes.
More than one-quarter of self-storage customers are commercial, and their numbers are increasing. Commercial business is a market segment the industry is enthusiastically wooing with value-added services such as powered units, office facilities, administration services and document retrieval.
Mobile, or door-to-door storage, is also making its presence felt. More facilities are likely to explore this option in 2006. While none of the larger groups have made the leap and no dedicated mobile-storage exists, an increasing number of facilities offer it as a value-added service in major regional towns. In the popular model, trailers drop off storage units directly to customers, who fill them. Packed containers are transported to storage facilities where theyre lifted off the trailer with a forklift or crane.
An ongoing challenge for the selfstorage association is managing growth and developing standards while maintaining industry self-regulation. Representing more than 80 percent of self-storage businesses in the region, the SSAA is considered by most operators to be an integral part of their successful operation. All members use the associations standard self-storage agreement and are working to follow its best-practice manuals, including Occupational Health and Safety and Manual of Advice and Procedures, which details the legalities of running a facility.
If you are interested in how the Aussies are developing the market, why not come down and visit during October and attend the SSAA convention and tradeshow? The SSAA is pleased to organize pre- or post-touring for international guests.
Rennie Schafer is the Self Storage Association of Australasias first full-time executive officer and has held the position since March 2004. Mr. Schafer, who holds an MBA, has a range of business qualifications and experiences and has been working with industry associations for more than seven years. For more information, visit www.selfstorage.com.au.