Property

Self-storage Investment Gains Attention

Self-storage Investment Gains AttentionSpace for Hire Storage may be a luxury in Hong Kong, but could it also be the next great investment?

The affordable, low-risk entry-level investment is the Holy Grail of personal wealth creation and management. The concepts are easy enough: buy low, sell high, collect commodities that are in demand and in low supply, offer them to other consumers for fixed periods of time at a positive yield. That’s easier said than done. As Hong Kong (allegedly) transforms into a policy-driven market and industrial and office space are the best performing property commodities around, there’s little for the private, individual investor to dabble in — unless they provide space for everyone else’s stuff.

Packing Up

A storage investment boom started in the UK a few years back, one that was large enough to warrant marketing here in the SAR. The idea of renting out self-storage space at a profit makes sense. As we collectively become more and more mobile, the demand for storage at “home” is increasing, as it is the demand for storage where one is resident and realising the disconnect between that home and Hong Kong flats’ concept of storage space. The best solution is to get rid of the junk you don’t need — or stop buying it — but human nature is what it is the beat will go on.

The basic idea of storage investment is similar to that of a resort property. Investors buy one unit in a large storage provider’s facility (like a hotel) and collect a yield on the unit rented out by the brand (in the resort’s case, St Regis for example) on their behalf. In 2011 there were over 700 self-storage facilities in the UK generating in excess of £360 million (HK$4.3 billion) each year, concentrated around London. Given Hong Kong’s space constraints and shrinking flat sizes (storage suffers for that extra bedroom) could this be the city’s next great investment sector?

Perhaps. In August, Colliers International completed a whitepaper looking into the viability of self-storage within Hong Kong’s property sector, calling it an “overlooked property market niche.” Their findings indicated demand could be as much as four times the current supply. “Self-storage is a niche sector in the property market, and till now has been largely overlooked,” said Arthur Yim, manager of research and advisory services. “With Hong Kong people becoming more accustomed to using self-storage, plus the benefits of stable rental income and premium yields, it’s a sector that looks set for significant growth.”

Colliers’ research estimated that more than 800,000 homes had no storage room, putting the potential market size at roughly 12 million square feet. Currently there is approximately three million square feet of self-storage space spread across the city. It will come as no surprise the bulk of that is located in Kowloon and the New Territories.

Caveat Emptor

But in January, the Self-Storage Association of the UK released a statement commenting, “The SSA UK is concerned that people may be investing in the various investment vehicles which trade as Store First, unaware of the potential risks that may be associated with such investment. It is also concerned that the material that Store First distributes to market this investment, which refers to figures from SSA UK’s Annual Survey, does not accurately represent the state of the industry and may lead investors to make unrealistic assumptions about the industry and this specific investment opportunity.” Store First was marketed in Hong Kong as an investment four years ago.

The SSA UK’s concerns pivoted on overstating yields (touted to be as high as 12 percent), real market value, resale value and hidden fees investors were unaware of. The SSA UK also cited similar issues in storage rental schemes in Australia. So while the Association and Colliers agree self-storage investments are strong, viable options, investors need to be clear about risks. “The principal risks that self-storage companies encounter include market risk, industrial property price volatility in medium term, and tenancy risk. Most of these can be mitigated,” stated Colliers’ whitepaper. Other issues included facility accessibility, price volatility and softening yields, though industrial property is expected to trend up in 2015. “Similar to other business sectors, local economic performance affects the demand for self-storage services. However, a structural need exists as a significant portion of private housing lacks dedicated storage space. Given the extreme undersupply even if a significant downturn in the economy occurred this sector is likely to outperform other property sectors,” the report finished.

The relatively new investment will have its share of bumps in the road, and more problematic in Hong Kong is the thought of creating millions of square feet of storage space when the government struggles to provide enough land to meet the demand for housing. Nonetheless, as non-traditional investment opportunities are on the rise, developers maximise floor areas, small to medium sized flats are the standard and offices, too, are sacrificing storage space for staff, Colliers is unsurprised self-storage investment is finally getting noticed. Finished Senior Director, Industrial Services Wayal Chiu, “The returns possible in this sector are compelling. Expansion in Hong Kong self-storage is certain.”