Sponsored By

EU Property Market Valuation

January 2, 2007

6 Min Read
EU Property Market Valuation
The European self-storage industry has expanded over the last few years. Although less fragmented than in the United States, it’s dominated by a handful of larger players and a few midsized operations. However, increasing numbers of new businesses are joining the market, many with ambitious plans for expansion.

Europe’s self-storage industry is concentrated on mature economies such as those of Belgium, France, Holland and the United Kingdom. The market is still immature, affording many opportunities for value growth as the asset class establishes itself; value is further enhanced as individual stores attain a stable trading position.

Storage professionals prefer owning freehold rather than leasing property. This perhaps reflects the capital costs of converting an existing building for self-storage purposes. In fact, many operators view self-storage as much a property play as a strong cash flow-generating business.

Supply

The United Kingdom is considered to be the most mature market in Europe. Its supply of storage is estimated at 17.5 to 20 million square feet, equating to about 0.3 square feet per capita. Interestingly, much of that is focused in southeast England. Therefore, the figure of 0.3 square feet of storage per head is probably higher in this area, and correspondingly lower in other regions.

Most European countries have less storage than the United Kingdom, although Belgium and Holland are well developed. For example, the supply in Belgium is estimated to be 0.1 to 0.2 square feet per capita. Shurgard generally dominates the six northern European countries in which it operates. Other larger operators include City Box in Holland, Home Box and Une Piece en Plus (the latter owned by U.K. company Safestore) in France, and Casaforte in Italy.

Customer Demand

Anecdotal evidence suggests product awareness averages 15 percent to 20 percent in the London area with much lower figures elsewhere in the United Kingdom and other European countries. It may be higher in sections of the population most likely to use self-storage, such as wealthy urban dwellers moving up the housing ladder or those living in short-term rented space. However, it clearly remains a challenge for the industry to grow market awareness and increase demand.

Market Constraints

Financing is a major market constraint. New and smaller operators, in particular, struggle to obtain debt finance secured against the potential land value of self-storage use. Many banks will take a conservative view and be prepared to lend against only the latent—and usually lower—“alternative use” property value. Industry indicators show sourcing equity is relatively straightforward, but on the debt side, lenders need further education.

Although a rapidly growing industry, self-storage represents a small niche in wider property markets such as office, retail, industry and leisure property. The situation is aggravated by the virtual absence of leasing and sale of self-storage properties.

Data on trading information is scant in Europe. In the United Kingdom, the only public companies are Big Yellow and Lok’n Store. However, their published accounts show trading performance at merely the group level. This is in contrast to the United States, where trading data and information on property transactions is readily available. The data void has resulted in few property advisors with adequate experience to provide quality advice based on comparison data—a scenario unlikely to change soon.

Land Availability

Acquiring suitable property is the most significant hindrance to market growth. Self-storage operators—especially the larger ones—have been successful in broadcasting their property requirements to the real estate market. It’s now becoming recognized they can compete aggressively for development opportunities, especially against residential developers.

A recently marketed site in South London received more than 40 bids. Five of the top six bids were from self-storage operators; the majority of other bidders came from the residential sector. This is becoming a common theme for properties suitably located for storage. As a result, significantly more are being offered to the industry.

Land prices have increased dramatically over the last couple of years. Although self-storage operators are still buying sites that satisfy their criteria, including an adequate forecast return on investment, it’s becoming more difficult to buy sites at a significant discount to their potential worth. Hence, profits on development and conversion projects are falling from those previously achievable.

The Leasing Market

In view of the industry’s immaturity, it’s not surprising there is little information on the lease or trade of self-storage facilities, or indeed of their sale and leaseback. How much does it cost to lease existing premises for conversion to self-storage? There's no hard evidence that operators pay significantly above rental value in the wider property markets. In fact, demand and interest is much more focused on freehold property. Operators, aware of the capital investment required for conversion, will always try to keep rental costs to a minimum. In spite of these factors, there are numerous leasehold self-storage properties in Europe.

Capital Transactions

A particular feature of the European market is the scarcity of self-storage property trades. The market’s shallow nature is due to its small size and limited pool of vendors rather than any weakness of demand.

There have been a number of corporate deals, including the purchase of Shurgard by Public Storage. However, it’s never easy to interpret these deals and strip out the relevant yields and capitalization rates reflected at property level; complicating factors are just too numerous.

The lack of yield evidence presents a challenge for property consultants. I anticipate the situation will not change in the short-to-medium term. Nevertheless, with the few transactions that have occurred, plus some knowledge of the corporate activity discussed here, capitalization rates in the sector are clearly on a par with the rest of the property market. There has been a significant contraction in yields (i.e., improvement in value) over the last couple of years.

In addition, the differential in value between prime and secondary property has narrowed over the same period. In real terms, more is being paid for inherently riskier property.

Property Valuations

The correct approach for storage property is to assess market value in terms of trading potential. The method is similar to that adopted for trading such properties as hotels and car parks.

Valuations should replicate the methodology of buyers and sellers in the market—and trading potential is the approach widely used by self-storage companies analyzing the viability of a potential project.

Opportunities

Aside from the business potential of self-storage, there are opportunities—perhaps limited to the larger players—for adding value through economies of scale. Other business strategies include financial structuring to reduce the cost of capital for sale and leaseback. Business can re-organize through Propco/Opco structuring, by setting up a subsidiary (a Propco) that holds the property assets of the business, and leases them to another subsidiary (an Opco), which pays rent and operates the property. In the United Kingdom, REITS have been allowed since Jan. 1, 2007, providing a specific opportunity to enhance value for REIT investors through tax mitigation.

On the negative side, most countries with an established self-storage industry have yet to experience a severe economic or property-market downturn. It will be interesting to see how trading performance fares in a harsher climate.

The self-storage sector has a way to go before it fully comes of age. In the context of the wider property market, its lack of stock and property transactions means it remains a specialist sector. But, with the right property and funding, self-storage is a stable investment for investors of all stripes. 

Oliver Close is a partner in Valuation Advisory Services at the London office of Cushman & Wakefield, one of the largest privately held real estate services firms in the world. Founded in 1917, it has 189 offices in 57 countries, and employs more than 11,000. In Europe, Cushman & Wakefield is the leading value analyst in the self-storage sector. For more information, visit www.cushmanwakefield.com

Subscribe to Our Weekly Newsletter
ISS is the most comprehensive source for self-storage news, feature stories, videos and more.

You May Also Like