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storage 1 - Are self-storage units a viable development option?

Are self-storage units a viable development option?

By Mark van Dijk

, |

Storage units are cheap to build and easy to maintain, and there’s a constant demand for tenancy. So what’s the catch?

Self-storage units are a tempting option for property developers. But in an increasingly competitive market, cheap building costs and attractive rental income has to be balanced with a quality offering.

Stuff. It’s everywhere. From the cluttered top drawer of your desk to the parcel-taped boxes you’ve stored in your roof, you’re probably wondering how you’ve managed to accumulate so many things. You’re not alone – and whether you’re a shameless hoarder or a wannabe minimalist, you’ll need space to store the things you don’t want to throw away, but don’t have room to keep.

Stor-Age Property’s latest integrated annual report highlighted its two biggest customer groups: people needing short-stay storage due to life-changing events (less than six months; 31%), and people needing longer-term storage (more than a year; 52%). The reason Stor-Age published an annual report is because it’s a listed REIT (real estate investment trust), with shares floating on the JSE; and the reason it’s listed is because – if you do it right – there’s a fair amount of money to be made in the self-storage business.

That 2019 annual report recorded ‘sustainable growth in returns’ achieved through ‘real gains in rental rates and occupancies’, with a portfolio of R6 billion (R4 billion in South Africa and R2 billion in the UK), and a market capitalisation of R5.4 billion at 31 March 2019.

‘In South Africa, we experience a churn rate of approximately 5.0% per month and benefit from more than 1,400 new tenants moving in on average every month,’ the company said, pointing to an 84% occupancy rate across its 49 South African properties.

For property developers, it must sound like a complete no-brainer: take some empty land on the outskirts of a major city, build 25 or so garages, grow the development as they generate cash flow, get to about 300 units, enjoy 80%-odd occupancy and enjoy the low-fuss rental income. The per-square-metre building costs are significantly cheaper than residential developments, and the rentals are pretty good, given that the tenant keeps the key and takes responsibility for the contents. To illustrate: rentals at Storealot, which has branches in Eastgate and Epping, start from R747 per month for six square metres.

It certainly sounds more attractive (or lower risk) than an expensive commercial or residential development, which is precisely why so many developers have done it over the years.

Storage RSA, for example, has locations in Centurion, the West Rand, Stellenbosch, Somerset West and Durbanville, offering 12 different unit sizes (up to 36 square metres) that service the needs of both individuals and companies. Speaking recently about the layout of the Centurion branch, Storage RSA’s National Operations Manager Jo-zanne Wessels said: ‘Our linear buildings are conveniently laid out for easy access to the units. There are trolleys and large open loading bays to improve the customer experience when moving into upstairs units. We make every effort to ensure that our customers have a stress-free experience.’

Perhaps the biggest attraction for developers is that storage facilities can be built in unfashionable, out-of-the-way areas. After all, a garage unit that’s storing a newly divorced dad’s golf clubs and quad bike doesn’t need a trendy postcode or mountain view.

‘We continue to see the establishment of new self-storage properties,’ Stor-Age Chairman Paul Theodosiou noted in his annual report. ‘Many of these are opened in less-than-desirable locations, and where barriers to entry are typically quite low.’

But then comes the warning for developers who think they’re about to make a quick, easy buck. ‘Where properties are opened in improved locations, they are typically pre-existing buildings that have been converted into self-storage assets, or where a self-storage operator has taken a short-term lease from a landlord,’ Theodosiou added. ‘The short timeframe underlying this type of lease, as well as the relatively high cost to fit out a self-storage building, often results in limited capital investment by operators, and a less desirable product for customers.’

In other words, developers who think that storage units can be built cheaply (and maintained infrequently) will, in an increasingly competitive market, find themselves battling to keep customers. After all, if tenant gets hijacked on the way to checking out their quad bike, or their golf clubs get water damaged, they’ll soon start looking around for another option.

And, as the market grows, there are more and more options out there.

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