Self storage...it makes sense!

By Adam Smith, Senior Asset Management Director.

In 2009 as the grip of the GFC showed no signs of easing, Warren Buffet asked his lunch companion if he knew what the best selling chocolate bar was in 1962. Slightly perplexed, his companion had no clue. The answer was Snickers, and to this very day, the answer remains the same. Snickers has maintained its position on the top rung of confectionery preference. Nothing has changed.

In an industry of property professionals who are focussed on investment and seeking out the best returns, we like nothing more than to source data and forecasts that give us a comforting snapshot of the future. We seek to establish certainty in a world that is and always will be uncertain. As Morgan Housel put it in his most recent book, ‘we are good at predicting the future, except for the surprises, which tend to be all that matters’.

So perhaps, as he rightly suggests, shouldn’t the question be, ‘what will be the same tomorrow, in 5 years or even 20 years time’ and base our investment decisions on that, instead of basing them on predictions of what the future might be like?

One thing that is guaranteed, however far forward you look, is that death, divorce, disaster and dislocation (the four Ds) will still be happening. It’s for these reasons that self storage piqued our interest at Barwood and why we have recently announced our first investment into the sector alongside our best in class operating and JV partner, Flexiss.

Look back 20 years or so and any reference to a storage unit would create visions of a back street mechanic and a hoard of old tyres. Never would it have crossed your mind that the UK self storage sector would evolve as a mainstream asset class, providing investment grade income, underpinned by a high standard real estate offering.

Much like the student housing sector that went from mouldy cramped dwellings in the late-90s, to the purpose-built buildings that we see today, self storage has come of age. As investors embark on their quest for diversified and resilient income streams, self storage has come to the fore as a robust, operationally backed investment opportunity.

The demand evolution

Many factors have contributed to the substantial increase in demand for self storage that has been experienced over the past 5 years. Most of them entirely unpredictable!

Whether it be the high cost of housing or the impact of lockdown and how we use our homes (who would have forecast that), self storage provides a flexible and relatively low-cost solution. It is cheaper than renting or buying a larger home whilst affording the occupier a flexible leasing structure that can be terminated on short notice when compared to a traditional lease. Something that users will always prefer.

Not just a preference for the homeowner dealing with any one of the four Ds, an emerging trend sees small businesses also turning to self storage for their goods and products.  It affords an opportunity to be situated in closer proximity to their customers against a backdrop of ever-increasing demand for same-day delivery. Business demand has remained robust off the back of a lack of suitable, good quality alternatives.

As the number of people living in smaller homes in more urban locations is expected to grow, the logical outcome is an increased demand for storage, not just from homeowners but the businesses seeking to serve them.

Self storage has evolved to become the ultimate last-mile storage and delivery solution; the industry representative for what could be penned ‘serviced industrial’ and a wonderful solution for the typically British problem – what to do with too much… ‘stuff’. Something else that will no doubt be a problem in the future, as much as it is today!

A unique income stream

You will often hear investors and operators refer to the term ‘sticky income’ when discussing self storage. Whilst occupiers may shop around and select a facility based on proximity and cost, once their belongings are moved in, it rarely gets moved out. We’re all guilty of seeing our mobile phone bills increase year on year but how often do we make the effort to switch? This is no different. Referred to as ‘churn’, the UK market sees a rate of 98% (Cushman & Wakefield 2024).  This represents a robust retention level for what is essentially a high number multi-unit asset with limited occupier tie-in (they can leave on anything from 2-4 weeks’ notice).

The UK has a strong structural market which pitches growing demand against limited supply – a staple formula for rental growth. Whilst flexibility in leasing terms allows the occupant to leave on short notice, it also presents an opportunity in the form of frequent rent reviews. There is of course a balance – increase rents too often and you will no doubt suffer but get it right and the journey to higher rent and a stabilised asset is well supported.

Additional revenue comes from services that can be marketed to occupiers such as insurance, van hire, packaging and merchandise. The typical UK facility is also evolving its offering (as are we), capturing ground floor retail/trade units as well as serviced office suites and drive-up containers. Self storage is no longer just about ‘storage’ in the traditional sense and is continually commercialising its offering.

Investment performance

Looking to the listed sector and notable operators of scale – Big Yellow, Safestore and Lok’n Store - profitability has grown significantly over the past three years. Referring to a recent research paper from Peel Hunt,  Lok’n Store has experienced compounded growth of 16% per annum.

Whilst some of the occupancy boom generated during the pandemic has retrenched slightly, pricing growth has shown no signs of abating. Over the past three years, Big Yellow has seen its net rent increase by 28% with Safestore not far behind at 24%.

The self storage sector also benefits from low operating costs and has the potential to reduce this further. Online reservation, digital remote access and sustainable initiatives including PV panels and EV charging can all be adopted to enhance EBITDA.

These positive financial indicators have captured the attention of the Federation of European Self Storage Associations (FEDESSA). Self storage is now one of the preferred sectors for private equity seeking portfolio diversification. FEDESSA has observed an increasing level of interest for quality self storage facilities from both investors and existing operators who aspire to expand their portfolio. Couple this with low levels of supply and other barriers to entry (such as planning constraints), the facilities that do come to the market are sought after and pricing is competitive.

A bright future

In the UK, it seems that we will always have a housing shortage, there will always be renters in small dwellings, we will always have entrepreneurs looking to setup shop with desired flexibility on where they locate and for how long, we will always face the four D’s and we will always have too much stuff.

There will always be an asset class in the commercial sector that is fast becoming obsolete and ripe for re-purposing, whether that be offices to residential or stand-alone retail warehousing to….self storage. There will always be a use that can drive a higher land value today than the once dominant predecessor. Investors will always pursue rental growth but particularly in periods of market cycles where capital growth is muted.

We are excited about the self storage sector and delighted to be teaming up with Flexiss to pursue a portfolio strategy that will re-purpose redundant assets into stand-alone self-storage facilities with proximity to chimney pots and urban centres.

At Barwood, we are focused on delivering consistent returns for our investors against a backdrop of evolving sectors but long term structural trends  ….some things will never change.