The self storage sector in New Zealand is maturing as residential and business customers increasingly seek cost-effective storage solutions around the country. Total Property editor Jody Robb takes a look beyond the roller doors and security gates. In the self storage sector, the “four Ds” are widely touted as driving demand at facilities around the world.
Death, divorce, density (smaller homes, less storage space) and dislocation (usually positive change in circumstances like overseas travel, moving in with a partner, a job transfer) are the prime triggers for consumers seeking out storage opportunities.
According to the Self Storage Association (SSA) in the United States, the self storage industry there generated US$27.2 billion in 2014 and has been the fastest growing construction segment of the US commercial real estate sector over the last 40 years.
Total self storage rentable space in the US comprises more than 210 million square metres (2.5 billion square feet), occupancy rates hover around 90 percent and an estimated 9.5 percent of all American households currently rent a self storage unit.
The SSA says it took the US self storage industry more than 25 years to build its first billion square feet of space then added the second billion square feet in just eight years.
In Asia, the self storage industry is being driven by general economic growth across the more established markets like Hong Kong and Tokyo but also in newer markets likes Singapore and China. According to a Forbes article, self storage in Asia is attracting entrepreneurs and investors because they smell opportunity and deal flow is increasing.
The article claims that self storage demands rents four times as high as other uses for the same land such as factories, C-grade office space and warehousing.
High yields and low vacancy rates make the self storage sector enticing for operators. In Asia, where the middle class is growing rapidly, increased prosperity is leading to increased consumer spending and the accumulation of goods – which their owners do not have room to store in their usually small footprint households.
In New Zealand, the self storage sector is fairly fragmented with no dominant major owner across the country. Current operators are continuing to evolve their portfolios as the underlying fundamentals of major cities and regional centres change. There is strong evidence that Australian money is entering the self storage industry in this country's market as investors see New Zealand as having similar dynamics to those of our trans-Tasman neighbours.
Event driven market
The largest self storage company in Australia, Kennards Self Storage, is making moves into New Zealand with six facilities in the North Island across Auckland, Hawke’s Bay and Wellington.
Kennards is a private family-owned and operated business with 84 facilities spanning more than 53 hectares of storage space in Australasia.
Kennards Australian-based managing director Sam Kennard says the majority of the facilities are owned by the company, with “a handful” held by passive investors but managed under the Kennards brand.
“The market value of storage centres operated by us exceeds NZ$1.3 billion and we currently have six new properties in the development pipeline,” says Kennard.
“Our business will continue to acquire and develop new storage properties across our existing markets and where possible, expand existing locations to keep up with demand growth.
“We expect our capital expenditure programme will exceed NZ$50 million this calendar year.”
Kennard says the main consumers of self storage are generally those experiencing a significant life or business event.
“Self storage is event-driven so people cannot be motivated to use self storage as such,” says Kennard.
“An active housing market is a very good foundation for strong self storage occupancy.”
Kennard says the sector has grown strongly for more than three decades with the main driver being increased awareness of the service.
“As people become aware and use the facilities, they tend to appreciate it and become strong candidates to be repeat users,” he says.
“All demographic profiles are actually growing in the sector. Anyone over 18 years old is a potential self storage customer – all they need is a trigger event.
“Any economy with a strong growing middle class will see growth in demand for self storage which explains the emergence of the industry in Asia in the last decade.”
In identifying locations for its facilities, Kennard, pictured above, says a retail focus is deployed.
“Self storage is a retail business. We engage and transact with customers for relatively modest sale amounts on a day to day basis,” says Kennard.
“As such, the better self storage locations will have retail attributes. Typically this means being on a major road with easy access
“Proximity to the market base is important as self storage users are location-sensitive and typically prefer their goods to be stored close by."
“Self storage requires professional, high-quality management. It is not a passive property investment,” stresses Kennard.
According to Kennard, the average net lettable area of a New Zealand self storage facility is a little under 3,000m2 while in Australia it is a little higher than 3,000m2. A Kennards average size storage centre is more than 7,000m2.
The most popular individual storage unit size across the Kennard portfolio is 3x3 metres.
Like other commercial and industrial property developers, securing land for future self storage facilities is a challenge – particularly in the major centres.
“There is strong competition for good properties so prices can easily get beyond self storage viability,” says Kennard.
“Self storage is very capital intensive with significant investment upfront and a long rent-up period.
“It can take three to five years for a reasonable-sized centre to rent up to around 85 percent occupancy. There is also some inherent risk so the land price needs to reflect the time and risk of the project.”
Kennards places high emphasis on security measures investing heavily in comprehensive digital CCTV systems, alarms with back-to-base monitoring and it has numerous internal “unseen practices” to enhance the security of its centres.
Driven by residential customers
National Mini Storage was one of the first self storage companies in New Zealand opening its Penrose branch in 1991. Construction of its ninth Auckland facility is currently underway in Newmarket with a projected opening date of mid-September 2016.
It is a New Zealand-owned and operated private company and managing director Paul McFadzien says this country is a market leader in the industry.
“The multi-level facilities seen here since 1996 have subsequently been replicated outside of New Zealand,” says McFadzien.
“The industry started in the US more than 60 years ago and took off in Australia more than 40 years ago. The sector’s growth in this country has been driven by the rising population as, with most other key international markets, residential customers comprise around 75 percent of all self storage users at any given facility."
McFadzien says he wouldn’t say the industry has boomed in New Zealand – rather, it has become more prominent.
“Between 2000 and 2007, (the start of the global financial crisis) many property developers entered the industry seeing it as having far better returns than normal property development/investment – which it did,” explains McFadzien.
“However, most have subsequently exited the industry having sold out. Since then the Australian property investment fund Abacus (trading under the Storage King management brand) has been very active in acquiring property, while Kennards has acquired a number of New Zealand facilities.
“More recently, National Storage Australia (the only ASX-listed storage real estate investment trust) has acquired properties in Christchurch and Hamilton and like other Australian-based companies, is actively seeking more."
McFadzien says National Mini Storage will continue to grow based on opportunities it identifies in its chosen markets.
“At its most simplistic, an emerging location is wherever there is population growth with a level of disposable income to support the business,” he says.
“Brand new suburbs where buyers are more often than not 100 percent funded into property do not usually make for a good self-storage facility location – unless there are alternative supporting income streams – until residential property is on its second or third sales churn.
“Given the residential population makes up the majority of our customer base and those customers tend to come from within a three to five kilometre radius, we look to be as close to the houses as possible.
“The key challenges in most markets are land costs, location and the planning controls that apply."
National Mini Storage’s facilities generally offer more than 1,000 storage units per site. Its Albany facility is New Zealand’s largest with 2,200 storage units.
“With facilities these days being multi-level – National Mini Storage has not built a single-level facility since 2000 – yard size is not a key factor. As an industry, we all look to achieve a net lettable area that equals 75 percent of the gross site area,” says McFadzien.
McFadzien says the industry worldwide is fairly uniform with regards security options, generally offering individually monitored unit alarms, PIN access in and out of facilities, CCTV and infra-red alarm systems. New Zealand’s use of electric fences to provide perimeter security differentiates it from global markets.
A smaller operator
An Auckland-based private investor who has added self storage facilities to his commercial and industrial property portfolio says redeveloping existing buildings is the most economic option today given rising land costs in major cities.
Scott Palmer has three self storage properties in Auckland – Onehunga, Panmure and Glen Innes – and one property south of Melbourne.
“I own my properties and have a branding and management contract for two of the Auckland ones with Storage King, the Australian-based franchise with 150 facilities across Australasia including 23 in New Zealand,” says Palmer.
“The Glen Innes property is self-managed and I have owned it since 1991 when self storage was really just starting in New Zealand.
“I am always on the lookout for new opportunities as it is a growing sector. However the challenge lies in acquiring suitable land or buildings for development in locations with strong traffic flows and good accessibility.
“The cost per square metre and the need for locations in the vicinity of residential, commercial and industrial property makes the investment equation difficult. Emerging locations in Auckland such as Hobsonville where there’s extensive new housing development underway are the sorts of opportunities that the self storage sector could be looking towards.”
Palmer echoes the thoughts of Kennard and McFadzien in saying that Australasia has taken up all the lessons that US markets have learnt from as pioneers of the industry and is now ahead of the pack in many ways.
“The trend for multi-level buildings is now going into developments in Europe and Asia and makes sound economic sense given the squeeze on land."