HOW RESILIENT IS SELF STORAGE?

By Linda Sharkey, Director – Urbis.

At the end of the financial year, the property market takes a breath and the internet is flooded with annual performance reports of listed companies and REITs. This year, analysists went into overdrive reporting on the outcome of various portfolios. Unsurprisingly, investors with more exposure to shopping centres, pubs and hotels delivered weaker results than portfolios weighted higher in logistics and alternate investments such as self storage. Some traditional sectors reported less than 50% rental collection over Q4 2020 and portfolio valuation write downs were expected and accepted.

Resilience is the COVID-19 buzz word when it comes to property, a word we are quite familiar with in self storage. So, just how resilient is self storage?

PRE-COVID-19 CONDITIONS

COVID-19 hit us at an interesting time in the market – we were winding down from a busy residential selling season, the construction sector had been tapering off, household income growth was slowing, population growth was faster than projected and new self storage supply was the highest it has ever been. And the health of the market in early 2020? Revenue growth was weak, particularly across East Coast Australia.

Table 1 (below) is a summary of December 2019 Urbis Storage Index (USI) monthly revenue results.

TABLE 1

ZONE

Sydney Inner Melbourne Inner Brisbane Inner Sydney Outer Melbourne Outer Brisbane Outer Sydney Melbourne Brisbane Perth Auckland LATEST USI RESULTS

It is not surprising that the latest USI release (June 2020) has continued the trend of weakened performance given revenue growth was subdued prior. However, the real resilience test is the extent of which the market can sustain the impact of COVID-19.

Whilst the results are predominantly negative, we have not fallen off a cliff. Pleasingly, we have observed some rebound in the months of June, July and August, and most markets are demonstrating continuing recovery as we learn to live with COVID-19.

Table 2 (opposite page) is an overview of the USI annual revenue growth trend, based on monthly revenue as at 30 June each year

A NEW WAVE OF DEMAND

Operators are reporting a shift in demand and user profiles. We are seeing more small businesses use storage to see them through the current challenges. Retailers are innovating to reach their customers via online platforms and e-shopping is in force. Essential products are in strong demand with quick, local despatching a priority. More people are choosing to operate businesses out of their storage unit, particularly where on-site facilities are good. Young adults have moved back home and are storing their possessions. People are in limbo, waiting for a change in landscape to make their next move. The purpose of the home has evolved - an office, a school, a sanctuary – all of which need space.

Discussions with major operators suggests notably higher move ins than move outs over July and August, along with increased new enquires.

Necessity appears to be driving the new wave of demand.

June 2019 to December 2019

(Six-month revenue performance) 0.17% 2.46% 1.15%

-0.44%

1.13% 3.87%

-0.05%

1.71% 2.18% 0.29% 0.69%

December 2018 to December 2019

(12-month revenue performance) -0.63% 1.64% -1.53% -0.61% -0.84% 1.50% -0.62% 0.25% -0.38% 3.97% 2.51%

TABLE 2

ZONE

Sydney Inner Melbourne Inner Brisbane Inner Sydney Outer Melbourne Outer Brisbane Outer Sydney Melbourne Brisbane Perth Auckland

WHAT WILL THE NEXT SIX MONTHS BRING?

Possibly the greatest risk to our sector is a prolonged period of low population growth. A trend of new supply in pockets of strong forecast population growth has emerged over the past 2-3 years. Likewise, revenue growth has benefited from new high-density residential development. Without new, concentrated population growth, pockets of new, or high, self storage supply may feel the heat.

Delinquencies (or arrears) appear to be holding strong. In fact, we have had some reports of delinquencies improving over the ‘COVID-19 period’ with more directed management. Nevertheless, continual monitoring is important, particularly as Government stimulus ceases. We have also observed that the use of fee rate concessions (or incentives) is on the rise. The industry needs to be mindful that extended reliance on increased fee concessions will create a market dependency that may become difficult to shake. As valuers, we do not like to see these practices turning into rising trends.

Transactions have been occurring over the ‘COVID-19 period’ and capitalisation rates have held. We are also seeing new investment interest in the self storage asset class. However, value growth should not be dependent The June 2020 USI release, as a point in time measure of the market, may have been a mostly negative story, although overall, the results are contained. We are cautiously optimistic that the self storage market will push through the current challenges and continue to demonstrate strong resilience to external disruptors. l

December 2019 to June 2020

(Six-month revenue performance) 1.67%

-4.16% -2.35% -1.80% -2.49% -0.09%

0.40%

-3.23% -1.48% -0.80% -1.10% June 2019 to June 2020

(12-month revenue performance) 1.85% -1.81% -1.23% -2.23% -1.39% 3.77% 0.34% -1.58% 0.66% -0.52% -0.42%

$2,300,000

$1,800,000

$1,300,000

$800,000

$300,000 MONTHLY REVENUE TREND MONTHLY REVENUE TREND

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Sydney Inner Melbourne Inner Brisbane Inner Sydney Outer Melbourne Outer Brisbane Outer Perth Auckland

on capitalisation rate compression alone. Protection of revenue will be the most important focus for operators, and indeed for valuers. Where real revenue growth is difficult to achieve, value can be created through reducing operating expenses.

In summary, the self storage asset class continues to show resilience when tested. As with previous market cycles, there will be opportunities and there will be challenges. The self storage market has responded well to the challenges of the COVID-19 pandemic, as it has done in previous downturns.