Self-Storage complexes

While in Australia recently reading the AFR, a headline caught my attention. Singaporeans plot Aussie self -storage raid with $460m war chest. The story was about Singapore-based self-storage operator StorHub, after obtaining funding of $460m, are keen to purchase more complexes in Australia. This expansion is part of their plan to amass a portfolio of circa $US5 billion.

It got me thinking if the big boys are in there buying self-storage complexes, then you have to assume they must be good investments.

To learn more about this commercial real estate investment category, I sat down with David Chapman. David built the Safeway 560 unit self-storage complex with a live-in manager in Lower Hutt and, after operating it successfully for 22 years, sold it to Australian public-listed self-storage complex National Storage.

Continue reading to view the full interview with David.

To kick things off, David, can you please give us some background on your involvement in the self-storage business?

The self-storage business was very new to New Zealand when I started out in the mid 90s.  There were, I think, only a couple of self-storage facilities in the Wellington urban area and none at all in the Hutt Valley.

In those early days, the few self-storage facilities which did exist were mostly fitted out in repurposed out-of-date multi-level industrial buildings (old wool stores and the like).  There were few, if any, purpose-built facilities in New Zealand – perhaps one or two in Auckland, although none in Wellington.

I began the design and consenting processes for the Safeway Self Storage facility in Lower Hutt in 1995. Construction (including the extensive earthworks required to prepare the building platform) took place during 1996/97, and I operated the facility from the time it opened until November 2019, when I sold the business to ASX-listed National Storage.

The land – located at the outer edge of Lower Hutt's central commercial district – was ideal for a purpose-built self-storage facility.  The site was large enough (about 9,000 m2), had a wide (100 metre) frontage to a busy arterial road and was zoned for commercial use.

For maximum security and customer convenience, and for competitive advantage, I built to the most up-to-date standard.  The development featured wide driveways and generous turning areas, a monitored fire alarm system, CCTV and computerised accounting linked to a state of the art controlled access and door alarm system – things not at all common at that time due to their novelty and cost, although they certainly are now.  I built 560 units in nine buildings (about 5,700 m2  gfa) – single-storey buildings with level access to begin with, and I added a two-storey climate-controlled building a year or two after the facility was opened.  At the time, it was one of the best, if not the best, self-storage facility in New Zealand.

Accordingly, the facility became known for its ease of access, range and type of units, high standard of housekeeping (general appearance, cleanliness, pest control etc.) and customer service.

In your opinion, what are the key things for a successful complex?

They’re pretty obvious really, and it beats me why they’re so frequently ignored or done badly.

The first rule is the golden rule applying to all real estate – location.  So you need to be in the right place (as close as you can be to your customers and as far as you can be from your competitors), with good vehicle access, on or visible from a busy road and the site needs to be big enough – this is often overlooked.

Big enough means of sufficient size to generate the income necessary to provide a satisfactory yield after proper allowance for management and maintenance.  Metal buildings need quite a bit of maintenance in order to prolong their lifespan in New Zealand’s relatively humid marine environment and self-storage is a class of commercial real estate requiring active specialised management – the cost of managing a facility with say five hundred or a thousand units is only marginally greater than the management costs for a facility with only two or three hundred units.

Technology.  Good technology is essential – you need a well-designed, intuitively functional website, controlled access and alarm systems and good space management software – a well-managed facility will be run with laser-like focus on KPI’s.

And finally, I think you need to add some zing to the gig – something to differentiate your facility from your competitors. It could be something as simple as fantastic customer service (which costs nothing and is what you ought to be doing anyway), or it could be a product – climate control, wine storage, a small business hub or whatever.

What occupancy level do they normally run at?

Generally, around 80-90%. 95% is great but hard to maintain. Less than 75% indicates some kind of problem.

What's the common split of commercial versus residential users?

There’s no common split, the ratios will vary from location to location.  Although commercial tenants, on average, tend to stay longer than residential tenants.

What kind of return do these properties produce?

The net yield is similar to industrial property – the sector’s closest cousin.

How competitive is the business?

It’s very competitive.

There’s been a lot of new building over the last decade or so (both nationally and internationally) and this additional capacity has resulted in increased competition in most markets.  And particularly fierce competition in markets which are close to being, or are, overbuilt.

And I think it is also the case that quite a lot (but by no means all) of this new capacity has been built without any proper market analysis or regard to the criteria discussed earlier – so it’s likely some operators are going to struggle a bit in an environment where there’s plenty of choice, customers’ expectations are greater than they used to be, and market dynamics may have been altered by the recent entry of the large corporate operators.

Since you developed your complex back in ‘97, what have been the major changes in the industry?

Size and scale.  When I built the Safeway facility, a two or three acre site and sixty thousand square feet of space was a big deal, but it isn’t now.  If I were starting over today on the same site, I’d be thinking of something at least twice the size.  And big box construction rather than single-storey buildings.  As I said earlier, the management effort (and cost) of operating a big facility isn’t greatly different to that of a small one, and, of course, the cost and difficulty of acquiring a suitable site now necessitates a much greater intensity of development than was the case when I started out twenty-five years ago.

Also, how widespread it is, having gone from something novel to ubiquitous.  And interestingly, the business is still overwhelmingly owner-operated notwithstanding the rise and growth of the highly acquisitive chains, the largest now valued in the billions with hundreds (even thousands) of facilities and millions of square feet under management and with revenues to match.

Why do you think investment funds are investing in this sector of real estate?

Yield – the global search for yield.  And at this level, self-storage is now regarded as a suitable and attractive investment due to its dramatic growth over the last fifty years, strong bottom-line performance and operational resilience and, given the fragmented nature of the business, the potential for major investors looking to enter the sector or scale up their existing operations either internally or via acquisition.

Are you pleased you sold in 2019?

On balance, yes, I think so.  It never was my plan to build the business up in order to sell it, but National Storage had looked at the New Zealand market thoroughly before entering it and had worked out what they wanted to acquire and where, and their guys approached me on several occasions, the last at a time when the market had been running pretty hot with yields for commercial property compressed virtually to all-time lows, so that was an important consideration – although it wasn’t at all the only or deciding factor.  Overall, I think that after more than 25 years in the game, I’d simply had enough of it and so, for me, National just happened to come along at the right time.