The idea of strata self storage has appeared and disappeared in waves in the Australian and New Zealand self storage sector over the past 20 years. It seems that there is a re-emergence of this concept in recent times. Developers with slick campaigns and well-oiled businesses promote the concept with confidence.
Kennards Self Storage offers this paper to provide guidance and insight to potential investors.
The idea of buying a storage space has appeal for to 2 traditional property buyer categories. The first is for the owner- occupier. This might be tradespeople or small business who identify the need for a storage area as permanent solution for the stock or equipment. This seems like quite a pragmatic approach. Though it isn’t without risk – particularly in regard to capital preservation.
The second buyer category is somewhat more adventurous and risky – the investor.
The attributes of self storage make strata storage investment a very risky venture. These common misconceptions about the business are explained below:-
1. Storage customers are mostly very short term – most customers of self storage need the space on a temporary short-term basis. Some need the space for only a matter of weeks. This means the space will experience periods of vacancy. Investors in strata storage perceive that the space will not endure periods of vacancy – this is a mistake. Expect regular and sometimes extended vacant periods.
2. Underestimating the marketing and management required – the business of attracting customers and renting spaces takes skill, expertise and effort. It is a specialist field with many professional operators. A suburban real estate agent is not equipped to market to storage customers or attend to their needs. Without a pro handling this, then the storage investment will underperform.
3. Underestimating the operating costs – dovetailing with the intensiveness of the marketing and management is the operating costs required to properly manage a self storage facility. Expenses are not limited to utilities, taxes and insurance – but are much more extensive.
In addition, many councils apply a minimum amount to Rates. This means theses small investments may attract disproportionately high council rates.
4. Prevailing storage rents are not understood and do not support the purchase price – The developers and promoters of strata storage seek prices that cannot be sustained by the storage income. The asking prices are inflated which will be very rewarding for the developer, who is promoting the concept with an advertising campaign.
Investors do not appear to conduct adequate research into the local storage competitive landscape. Scratching the surface it is quickly revealed that local storage rents without allowing for vacancy and operating costs would deliver the most modest of returns. Then, to deduct vacancy, bad debts and operating expenses it quickly reveals how sub-par a strata storage investment typically is.
In addition, any schemes that offer rental guarantees require even more scrutiny. Rent guarantees can be used to artificially to support an excessive sale price.
What’s the exit?
Another risk issue for both kinds of buyers, is the exit plan. Strata storage does not have an established secondary market. In the absence of a market, the asset is very illiquid and hard to sell. This may mean that prices drop causing a capital loss, or just being frozen with no buyers at all.
Previous episodes of strata storage development schemes were adventurous to say the least. There were even occasions for ASIC to step-in and moderate the marketing message. Unfortunately, the history of strata storage investment appears to have left considerable wreckage and negative results.
As with any property investment: do your homework. At the end of the day it’s ‘buyer beware’.