Why self storage could be a good place to stash some cash

Pendal

December 2023

Self storage is an under-appreciated part of the real estate industry that could be a big winner from Australia's growing population. Julia Forrest explains the investment opportunity. 

SELF-STORAGE is not the first place many investors would think of as a place to stash some cash.

But Aussie equities investors looking for opportunities should take a closer look at the industry, says Pendal PM Julia Forrest.

"The world of self-storage is not something you often hear about, but it's an asset class we like," says Forrest, who co-manages property investing in Pendal's Aussie equities team.

Record high immigration and a downsizing trend towards apartment-living will fuel ongoing strength in the self storage industry, says Pendal's Julia Forrest.

ASX-listed National Storage REIT (ASX: NSR) -- which operates 230 centres across Australia and New Zealand -- offers exposure to the sector.

NSR is the biggest active position in Pendal's property strategy, Forrest says.

The opportunity explained

High inflation and rising interest rates have seen a somewhat muted investor appetite for real estate over the past twelve months.

Office assets are trading as much as 30 per cent below book value and the retail and logistics sectors are both under some pressure.

But self-storage assets are defying that trend, underpinned by strong demographics, low maintenance costs and inbuilt inflation protection, says Forrest.

"Occupancy was supercharged during COVID -- and is now returning to normal -- but the underlying metrics remain very strong, linked largely to Australia's strong population growth."

Self-storage assets were in strong demand during the COVID lockdowns period as young people returned to the family home, expats were forced to return at short notice, and many households had to clear space for working from home.

Now immigration and an ageing population are underpinning the industry's growth.

Forrest says 70 per cent of self storage clients are individuals looking for somewhere to store their possessions, often prompted by a life event.

The remaining 30 per cent are businesses needing somewhere to store their inventory, building materials, and tools.

Low costs, strong prices

One of self storage's key attractions is very low maintenance costs compared to other types of real estate.

"It costs very little to maintain -- you're replacing lighting, there's a minor amount of depreciation. That means you get strong, resilient cash flows."

As a result, valuations are holding up well as other real estate sectors come under pressure.

Retail real estate faces structural headwinds from the move to online shopping and infinite supply of virtual alternatives to physical store space, says Forrest.

Office is also facing structural change in the way people work and has risks ahead as the economy slows.

"But self storage is not a discretionary purchase -- a lot of it is needs based because of those life events, which makes it a little more resilient than the other sectors.

"Self storage is still transacting at book value. Office is 20 to 30 per cent below book value. Retail and even industrial are beginning to see a bit of pressure on book values, but self storage continues to transact at book values."

Self-storage sites also have the potential for transformation into high value industrial and logistics space, she says.

"Industrial vacancy is incredibly low. For self storage, one of the higher and better uses is as industrial. You don't get that with office because of zoning."

Inflation protection

Forrest says self storage offers a level of inflation protection in a portfolio because of the short duration of leases.

"Because you're leasing month to month, if there is a big inflationary spike you can just lift your rate. You are not locked into a long-term lease. This provides quite a lot of inflationary resilience."

She says the Australian market is quite immature relative to other markets.

"Self storage space in Australia represents 2.1 square feet per capita. In the US, it's closer to 6.1 square feet per capita. So, in terms of available space, Australia is relatively under serviced, although the US is a much more mobile market."

Real estate sentiment shifts

Sentiment towards real estate has shifted markedly in the last few weeks after a tough year amid signs that inflation is coming under control, Forrest says.

"Until very recently, people were very concerned about interest rates and inflation.

"But with a couple of lower CPI readings here and in the US, the market's pricing of future rate hikes has come way back and that has led to a real estate rally."

Author: Julia Forrest & Pete Davidson

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