Thinking outside the box
The ‘great Australian dream’ of acquiring a sizeable home in which to live often comes with a catch – the extra space encourages us to accumulate more belongings.
Life events such as marriage, divorce or death can also leave us with excess furniture and belongings and no place in which to store them.
This trend is not confined to Australia and as such, the self-storage industry is beginning to boom in the United States.
The self-storage industry in the United States has been around for almost 40 years. There are approximately 48,500 facilities in the USA, which generated more than US$22 billion in revenue in 2012.
Trevor Berry from Self Storage Sales Australia says Australia is following in the footsteps of the US market.
“The market for storage space in the United States is huge,” he says. “Australia is lagging behind, but we’re at the stage they were in the 90s.”
The question remains though: do self-storage units have anything to offer investors?
Growing demand
When it comes to investing in self-storage units, one of the primary considerations would have to be demand – will it be low, causing long periods of vacancy?
John Muys from Aussie Strata Storage claims that if a unit is purchased in the right location, it can have an occupancy rate almost matching that of residential property.
“Our experience across the six developments we run shows they run at about 90 to 95 per cent occupancy. One or two may be available, but at other times we have a waiting list,” Mr Muys says.
According to Mr Muys, it’s not just individuals who utilise self-storage units; businesses are always in need of extra floor space.
Tradies who have outgrown working from home or from the back of their Ute, accountants and lawyers who are storing files, and building companies that need somewhere to store their materials are just some of the commercial clientele Mr Muys deals with.
“You also have your more affluent clients, who use the space to store their cars in cities they visit frequently,” Mr Muys adds.
Areas along the coast are also popular, with ‘water toys’ like boats and jet skis needing a secure storage location.
With the average cost of a storage unit significantly lower than most other properties, Mr Berry suggests that if vacancy periods are a concern, purchasing multiple storage units for the same price as a home will reduce the chance of having zero income.
“If you have one tenant and that tenant fails or goes bankrupt, you’ve lost 100 per cent of your income. With a storage facility with 10 tenants, you’ve spread that risk across a lot more people,” he explains.
“You will never have no income. The whole industry revolves around people moving in and people moving out, but you will never get hundreds of people moving out all at once.”
If a storage unit is purchased in the right location, it can have an occupancy rate almost matching that of residential property.
Small spaces, big benefits
You can narrow down the locations in which to buy self-storage units based on where high-income earners and those with disposable income are likely to store their possessions.
“Key locations for these facilities are close to CBDs, airports, high-cost housing areas where land is expensive and it’s not financially viable to build a garage,” says Mr Muys.
Even in these locations, self-storage units can be purchased for around $100,000 and according to Mr Muys, they can generate returns of seven per cent and average four per cent per annum in capital growth.
Little to no maintenance is required and the unit is ‘tenant proof’.
“If you get an angry tenant, there’s nothing they can do to trash the place and cause thousands of dollars in damage,” Mr Muys continues.
Self-storage units also come with low strata costs. Currently, strata levies sit at $30 per annum per square metre, costing investors just $650 a year for a 22 square metre unit.
Risks and considerations
Unscrupulous developers sometimes prey on investors who are looking to break into a cheap market.
While a majority of operators are honest, too many investors have lost their money because they didn’t do enough research, according to Mr Berry.
Mr Berry encourages investors to look for established facilities.
“If it’s what we call a ‘mature’ facility, which has been up and running for a while, then that is a safer investment than buying one off-the-plan,” Mr Berry advises.
But even after sourcing a legitimate investment opportunity, finding a lender who will back your investment may also be tricky.
Typically, lenders don’t approve loans for properties under a certain floor space because they are considered risky due to difficult resales.
Warren Dworcan, director of Rate Detective Finance and two-time Australian Broker of the Year, explains that buying a self-storage unit would require securing a commercial loan.
“Commercial loans work differently to residential loans,” he says. “The banks won’t give you a favourable loan-to-value ratio (LVR), so you will be required to have a deposit of up to 40 per cent.”
So investors looking for a cheap entry point may still have to get a deposit of up to $40,000, which could typically act as a deposit for a much more expensive residential property.
Mr Berry believes this is why a majority of individual self-storage investors are in their 50s and “have some equity and assets behind them”.
“Generally, they’re looking for a better investment to sustain their retirement,” he says.
Little to no maintenance is required and the unit is ‘tenant proof’.
Case study: Ross Porter, AFA Insurance Pty Ltd
Uncertain international markets and falling term deposit rates have made it harder for Mr Porter to secure high-yielding investments.
“Looking around for alternate investments, I found exactly what I was looking for in the property market with an investment in storage units,” he says.
“For the same cash investment in a single property asset I have purchased multiple storage units. I found there were plenty of small businesses wanting to lease storage units, which means I have been able to secure tenants immediately.”
He is pleased with his seven per cent annual return on capital investment.
“This gives me the long-term flexibility to liquidate part of my investment portfolio whenever I need access to ready cash,” he explains.