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Storing Up Value

Storage Units may not sound like an exciting proposition but, for investors lucky enough to get in on them, they offer steady cash flow, low risk and easy management, reports Miriam Bell.

By: Miriam Bell

31 July 2018

Investing in storage units doesn’t have the glamour appeal of an on-trend office building or a well-located retail property. But in many countries storage units are considered an attractive commercial investment.

In the United States and Australia, storage units are a niche sector of their own. Not only do investors buy existing storage complexes and/or develop new ones, but they can invest in property syndicates which specialise in the sector.

The sector is less well developed in New Zealand. But it is getting bigger and it is widely considered that growth will continue. In recent years, some large Australian storage businesses have moved into the New Zealand market. This suggests there is potential in the market.

But it also begs the question of how interested Kiwi investors can best utilise opportunities in the storage sector. So we talked to some experts and put together a rundown of what investors need to know about storage units.

Unit Attractions

They may be an unassuming investment, but storage units are an appealing one for many reasons. These include steady cash flow; less capital outlay and maintenance upkeep; and easier property management.

Bayleys Rotorua commercial agent Mark Slade says they are attractive because they have multiple tenancies, generally on short-term arrangements. “This is good because as tenants vacate the rentals can be reviewed. Multiple tenancies also reduce cash flow risk as if one or two tenants vacate there will still be several tenants providing cash flow.”

Storage unit investor Andrew Shaw agrees that the big attraction of storage units is the low risk factor. “You might have 100 to 200 tenants. Some weeks five may move out but maybe seven move in the next few weeks so the income doesn’t fluctuate majorly.”

That is in stark contrast to a commercial building where you have longer leases, but if the tenant vacates you go from a lot of income to negative income as you still have to pay the outgoings, he says.

These days another attractive factor is the scope for growth. That’s due to the increasing development of higher density housing options, along with trends like “empty nesters” downsizing and people moving round for work.

Slade says there are many reasons people use storage units (eg: they might be moving houses, travelling, or relocating for work), but more high density housing with less storage space means more people need to store possessions outside their homes.

‘Multiple tenancies also reduce cash flow risk as if one or two tenants vacate there will still be several tenants providing cash flow’ MARK SLADE

“People living in townhouses and apartments need extra storage options so demand for units will increase as that type of housing increases. That means storage complexes will continue to see growth which makes for a pretty good investment.”

Market Rareties

While it is easy to reel off the attractions of storage units, it is harder to find a storage complex to invest in. Both Slade and Shaw say storage complexes simply don’t come on to the market often.

Shaw, who used to be a commercial agent, says the last one he sold had 70 enquiries and about 13 bidders. “That’s about two to three times what you would expect for a really good commercial property. I’ve sold 12 or 13 of them over the years and they are always very popular.”

For investors, an alternative to buying an existing storage complex is developing one on a suitable section or converting an existing commercial building into units. Again, both Slade and Shaw know people who have done this successfully.

But Slade says once someone has done that, they tend to hold the property because they are so rare to come by and the returns are good.

“If an investor is thinking of developing one they would want to be close to the market that they are targeting. Also, if they are looking to buy land for the purpose they need to make sure they buy a section that allows that type of development. So an industrial type of site and one of a decent size.”

He adds that because storage complexes are generally on commercial land, when it comes to funding them the banks will view them as a commercial investment with commercial lending criteria. “Therefore it is often better to use a residential property as collateral and get residential finance to purchase.”

Case Study 1: Storage Complex

54 Geedes Road, Koutu, Rotorua Marketed by Bayleys Sold For: $367,000 This 16-unit storage complex on 896m2 freehold land was located in a strong, central industrial area. It had gross rental income of $36,212 per annum which provides an established, steady income. The property also had scope for improvement.

Risks And Returns

When it comes to prices, the costs of buying a storage complex can vary widely. One reason for this is that the size of complexes themselves vary. They can range from 10 units up to 2000, although the smaller complexes are getting more unusual. That’s because the cost per unit goes down with bigger complexes, because the per-unit cost for land goes down.

For example, Slade recently sold a small 16-unit complex in Rotorua for $367,000. It had a gross rental income of $36,212 per annum and scope for improvement.

At the other end of the spectrum, the most recent storage complex Shaw sold went for $2.5 million. It was a 132-unit complex in Te Awamutu with a 7.5% net return. He initially sold the complex to the vendors 15 years ago for $780,000 when it was 100 units.

Despite the wide price range, returns tend to be consistent – whatever the number of units. But to calculate the potential returns on storage units, the net cash flow is divided into the net purchase price and that equals the property yield or cap rate at purchase date.

Shaw says returns for the smaller complexes range from 7.5 to 8.5% after expenses and before management. “But it all depends on what the vacancy rate is or how much spare land there is. If there is room to expand by lowering the vacancy rate or building more units on site the yield may be lower.

“When you are looking at larger complexes, say 200 units plus, the yield would be higher because in the $3 million plus range there are fewer buyers. Also, you may need to employ someone to run it.”

The pros of storage complexes, including the returns, might outweigh the cons. But there are risks. Slade says there are definitely things that investors need to be aware of and think about. Chief among them are the fact that managing multiple tenancies takes time and has security concerns.

These risks can be mitigated by employing a manager and/or installing good, high tech systems, he says. “It’s worth investing in strong fencing with electronic gates, cameras, a swipe card monitoring system and even security guards. It makes sense and it also saves you time as a landlord.”

For Shaw, one of the big risks comes with developing a storage complex. “There can be a high capital cost when starting from new, especially as it’s difficult to find cheap land. It can also take time to build up occupancy and cash flow. And there’s plenty of competition.”

Apartment Options

For investors interested in storage units on a smaller scale, there is another option – and that is investing in storage units in apartment blocks. Apartment Specialists director Andrew Murray says apartment storage units are poised for growth.

“It’s like car parks. Ten years ago they weren’t a big thing. But now we see Auckland car parks selling for six figure sums. People see their value as more apartment blocks get built without them. I think the same will apply to storage units because people always need to store stuff.”

There is a catch: to buy storage units in an apartment block, it is necessary to own an apartment in the block already. But apartment owners can buy additional storage units in their building and rent them out to other building occupants for about $30 to $50 per week, Murray says.

“They are not valued yet, but they will be. When you have the influx of people coming into apartments that is about to happen, there will be a surge in demand. Yet there will be a scarcity of storage space because developers only create storage in a building when they have space that can’t be used for something else. And that all means there is great potential for value growth.

What To Think About In A Storage Investment

Bayleys Rotorua commercial agent Mark Slade says that when investing in a storage complex, there is a clear list of factors to consider:

  1. The location. Storage complexes don’t tend to be high profile, so a secure but popular area close to the potential user market is what is required.
  2. The number of units.
  3. The age of the units and any maintenance issues.
  4. The gross rental per unit, the size of the units and the going rate for the units above or below the market in comparison to other rental space in the area.
  5. Whether there is spare land available to create more units and improve the complex. 6 The cost of running the units, rates, insurances, security, keys access, and any employees.

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