Experienced Business Writer Tim Boreham interviews Sam Kennard. Published in The Age and The Sydney Morning Herald 24th March, 2018.
Self-storage mogul Sam Kennard has warned of “crazy projects” in development at a time when the sector faces a record increase in new capacity across the key capital city markets.
The head of the family-owned Kennards Self Storage, Mr Kennard said he had rejected project proposals in the past – only to see them funded and built by another party.
“The problem is that asset prices are quite high which makes it difficult for new projects to stack up,” he said.
“There are some crazy projects planned and I hope good sense prevails: the bank doesn’t fund them or the developer realises the capital costs are way higher than thought.
“But some have been built and they are struggling with anaemic occupancies.”
In recent years, investors have flocked to the $1.2 billion a year sector because of the relatively higher yields and the security of having hundreds of tenants rather than one or two. This popularity is not abating.
According to the property consultancy firm Urbis, 45 new self storage facilities are in the pipeline across the three eastern seaboard capitals, Adelaide, Perth and the Gold Coast – a 10 to 12 per cent increase in existing supply based on available lockers.
Of these new facilities, 20 are under construction and a further 15 have received development approval.
“It’s the highest level of self storage development activity we have ever observed,” Urbis senior valuer Tim Creighton said.
In its latest Urbis Storage Index report, the firm says average eastern seaboard occupancy levels have fallen by 2 percentage points over the last six months, from 87 per cent to 85 per cent.
At around 82 per cent, Sydney and Brisbane occupancies lag Melbourne’s 89 per cent.
Perth is a notable underperformer with occupancy of only 72 per cent, reflecting the mining state’s “more constrained economic conditions.”
But while average occupancy levels have decreased, average storage fees have increased by 3.4 per cent to $341 per square metre across the eastern seaboard – well above the inflation rate.
“It’s important to look at both variables when assessing the trading performance of a facility,” Mr Creighton said.
Given the lead time between development approval and practical completion, any oversupply issues would take some years to emerge and were likely to be confined to specific markets.
“Self storage facilities are local businesses, new facilities 15 kilometres away will not be of an operational concern,” he said.
“But trading issues will arise when new facilities open in customer catchment areas (of existing facilities) that do not have the required levels of additional self storage demand”
Mr Creighton said new supply in Sydney was centred around the north-west growth area, with seven new facilities slated over the next three years in locations including Marsden Park, Box Hill and Rouse Hill.
In Melbourne facilities are planned at Truganina, in the city’s outer south-west growth corridor, as well as in inner western Yarraville and in the bayside suburb of Cheltenham.
While he did not specify the dubious projects, Mr Kennard said parts of Brisbane, Adelaide’s northern suburbs and Geelong and Newcastle were tough markets.
In contrast, he would love to find suitable developments in North Sydney, Bondi and St Kilda.
“This is where there are no storage operations of scale and demand is high and density is strong.”
Research house IBIS World forecasts the sector to generate $227m from revenue of $1.2bn in 2017-18.
While the sector is spread across almost 700 operators, Kennards is the biggest operator in revenue terms with a 12.7 per cent market share.
Also private owned, Storage King has a 10 per cent share while the listed property trust National Storage accounts for 8 per cent of the market.
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