High housing costs and shrinking residential floor space are driving a boom in self-storage.
The housing crisis, enduring consumerism and a sentimental reluctance to let go of personal possessions means self-storage is now on the brink of becoming a £1 billion-a-year business, said The Guardian.
“Britons have packed away enough possessions to fill Buckingham Palace more than 60 times over,” the newspaper added.
Investors have set their sights on the sector, and their interest has been justified by “providers’ booming operational growth”, said Investors Chronicle. Listed self-storage brands such as Lok’nStore, Safestore and Big Yellow Group’s respective 2022 earnings per share were four, five and six times higher than they were just five years before.
Why is self-storage so popular?
Self-storage units are proving cheaper than renting or buying a bigger home, explained The Guardian. They are springing up alongside new housing developments across the UK, with at least 280 more stores planned by 2026.
The rise of remote working during the pandemic also saw many turning to alternative storage options, said property and consultancy brand JLL. Many employees carved out makeshift spaces within their homes to accommodate their work. “Inflated property prices also forced renters to consider relocation, often to smaller homes, giving rise to the need for self-storage to house additional belongings.”
“Self-storage bosses talk of the four ds that drive consumers to their roll-up doors: death, divorce, dislocation and downsizing,” said the Financial Times. “Add an i for inertia,” the newspaper continued. “The average customer rents a lock-up for less than 12 months, but some stow stuff for years.”
It is an unregulated, diverse sector ranging from vacant warehouses to empty barns, added the FT. “Just a couple of hundred are what are deemed ‘investment-grade’, that is big purpose-built outlets close to shopping centres convenient for clients.”
The rental returns on self-storage units are particularly attractive at £27.19 per square foot, according to the Self Storage Association. Its latest annual report suggests 50.4% of operators are looking to increase their rates in excess of inflation.
How to invest in self-storage
Self-storage properties are one of the lowest cost and best performing real estate investments, said The Motley Fool, since they’re “typically inexpensive” to build and operate and “have relatively low occupancy break-even rates”, helping to generate high margins and investment returns.
Many of the major self-storage providers such has Safestore and Big Yellow Group are listed business, so you could buy shares in the brands and benefit from growth, though there is also a risk that the share price falls and you lose money.
There are also self-storage REITs (real estate investment trusts) that own, operate and manage mini-warehouse storage facilities. In addition to generating rental income, explained The Motley Fool, self-storage REITs have several other potential revenue sources, depending on their business model. “These can include tenant reinsurance income, late fees, management fees, and the sale of moving materials.”
Is self-storage investment risky?
As with any investment, there are risks when it comes to putting money into self-storage.
“The market rightly has misgivings about inflation, rising interest rates and recession risks,” said the FT. Industry bosses remain sanguine, arguing debt is low, demand is still growing and short leases mean they can pass on rising costs quickly, the newspaper reported.
Barclays analysts warned that self-storage operators suffered in the 2008 financial crisis, suggesting the sector is “resilient but not recession proof”.
Investors are predominantly relying on their storage units being in use the majority of the time, said Quick Self Storage. An investor therefore needs to be confident the space is in an accessible location, is well promoted, and “that there is a genuine need for self-storage solutions in that local geographical area”.
Watch out for dodgy set-ups promising “guaranteed” returns of up to 12%, warned MoneyWeek. People have lost millions, often from their pension funds. “But scams aside,” the financial website said, “reputable companies that run storage facilities in the UK could prove lucrative investments.”
Marc Shoffman is an award-winning freelance journalist, specialising in business, property and personal finance. He has a master’s degree in financial journalism from City University and has previously written for FT Adviser, This Is Money, the Mail on Sunday and MoneyWeek.
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