Self-storage properties in the United Kingdom present a promising opportunity for investors seeking what proponents call “recession-proof” resilience in the real estate market.
To succeed in this market, prospective investors (especially new ones) should conduct thorough due diligence, understand their competition and stay attuned to economic conditions. The future of self-storage in the UK appears bright, with the potential for growth and stability in the coming years. Industry annual turnover reached £990 million last year and is predicted to hit £1 billion in 2023, according to a report from Cushman & Wakefield.
Philip Macauley, the London-based head of Self Storage UK at Cushman & Wakefield, spoke with LoopNet to explain the basics of this distinct asset class. He provided valuable insights into the self-storage market, recent developments and essential advice for potential investors.
With four years of expertise leading Cushman’s self-storage team and advising major clients such as Safestore, the largest UK operator, and Shurgard, the largest in Europe, Macauley has a wealth of trading data to stay at the forefront of market trends.
Self-storage is often considered recession-proof. Could you explain why this is the case and how the sector has historically performed during economic downturns?
The term "recession-proof" aptly describes the self-storage industry. It's a "sticky" business, with customers typically signing long-term contracts and enjoying the flexibility to adjust unit sizes. During economic downturns, while occupancy levels may experience a slight dip, rental rates tend to remain stable or even increase. This resilience was particularly evident during the COVID-19 pandemic when self-storage demand remained robust.
What advice would you offer to independent operators or investors looking to venture into the self-storage market?
Successful entry into the self-storage market requires careful research and due diligence. Understanding your competition is paramount. Analyse the local market thoroughly, paying attention to population density, socioeconomic factors, and demand dynamics. Identifying your target market and assessing the size of the facility you want to develop are essential steps in the process. Additionally, consider rental rates, returns, and stabilisation periods to make informed investment decisions.
How are self-storage properties typically valued or priced in the market?
Self-storage properties are valued using the profit method, which involves calculating the present value of expected future income. This calculation typically extends over a 10-year horizon, where income generated in future years is discounted back to the present valuation date. The process assumes an exit at the end of the 10 years, and the rental income for that year is capitalised to determine the property's market value. Capitalisation rates are commonly used in the valuation process, with adjustments made for factors such as location, building quality, leasehold/freehold status, and absorption risk. As of the current market conditions, the prime cap rate in the UK hovers around four and three-quarters per cent.
Can you provide insights into any recent significant deals or prevailing market trends within the self-storage sector?
Over the past few months, we have witnessed some off-market, one-off deals, but the most notable transactions occurred in March this year. One of the prominent deals was the acquisition of the Easistore portfolio by Nuveen and Storage King. This portfolio comprised a mix of container-based and purpose-built self-storage facilities and was sold to a private equity syndication. While there have been several smaller transactions, it's important to note that acquiring self-storage portfolios can be challenging due to limited availability.
Can you shed light on the distinction between leasehold and freehold properties in the self-storage market?
While many major operators prefer freehold properties (or buying the property outright), leasehold interests (or acquiring an existing leasehold from a tenant and then assuming the rent obligations) are becoming more prevalent, especially in high-demand areas like central London. Leasehold properties typically require less upfront capital investment compared to freeholds. However, they come with the ongoing obligation to pay a head rent. Leaseholds are often a practical choice for operators seeking entry into densely populated and competitive markets, allowing them to establish a presence without the financial burden of acquiring freehold properties.
Looking ahead, what are your projections for the UK self-storage market in the coming year?
The future performance of the self-storage market will depend on various economic factors, including inflation and interest rates. We have seen a recent decrease in inflation, though it remains relatively high. Additionally, there is an expectation that interest rates, after a period of stability, may decrease in the first quarter of the next year. Barring any unforeseen economic shocks, we anticipate the market will gradually recover in 2024 This recovery is likely to begin with the stabilisation of occupancy levels and could gain momentum, particularly in prime locations, by Q1 or Q2 of next year.
This interview is edited for brevity and clarity.