Often overlooked, self-storage may in fact supersede other investments by potentially giving returns of between 7-12% p.a.
I believe self-storage to be one of the most attractive alternative property sub-asset classes in the market today. In an environment of low interest rates and low returns, and with residential property not offering much yield in many markets, investors are now looking towards alternatives. Within Asia, self-storage is still a relatively under-owned and not very well understood sub-asset class. This is because investors traditionally like to invest in more aesthetically appealing A-B grade office and high street retail than an industrial asset. But what I find most appealing about self-storage is the returns. In Hong Kong, I have been able to achieve cash rental returns of between 7-12% p.a. depending on building location, size and style. And this does not take into consideration potential capital appreciation. Although, most commercial assets are purchased for their cash flow profile, I find it particularly interesting that capital appreciation for industrial assets in Asia is also attractive. This is because of the lack of supply of land, especially in places like Hong Kong, where developers are more likely to build shiny new residential or office block buildings. These all contribute to a structural undersupply of self-storage property, while at the same time, demand is rapidly growing in Asia. This is because apartment sizes are becoming smaller, demographic changes in terms of smaller households, and of course we all now consume and collect more stuff than prior generations (just count how many computer electronics we each now have). These all present a situation where demand far exceeds the supply, which then results in a very favourable environment for investment returns.
Experienced operator
Whenever I invest in self-storage, I prefer to align myself with an experienced operator. Given the divergent quality, style and service associated with some self-storage in the market today, one needs to have an experienced operator and manager who can optimise the asset and ensure good tenancy and occupancy. With an experienced operator managing a new self-storage site, I have been able to achieve average 95% occupancy which is generally reached within 9-12 months from initial development. Overall, the risk to self-storage is low and can be quite defensive as long as you choose the correct building location and match the product with the client's needs. That is why I always try to mitigate my risk by choosing an experienced operator or manager.
What and Where?
Self-storage investments can range from a single floor in a warehouse to an entire purpose built building. I still believe you can get 10% returns on selfstorage in HK, and indeed this is an area I am actively investing in on my own behalf and for my clients at the moment. Recently, I have been co-investing with other investors by forming my own club or fund or company structure so we share the investment risks and returns, while allowing smaller investors a chance to participate in much bigger deals. My favoured areas within HK are in the New Territories and East Kowloon. The area of East Kowloon, including Kwun Tong, the old Kai Tak airport site and Kowloon Bay Area is currently under massive government spending programme to boost connectivity and general infrastructure to support what will eventually become the second central business district of Hong Kong. Already the likes of Swire Group, etc have purchased sites and are developing A grade offices to take up some of the demand for office space spilling over from central Hong Kong island. This boost to infrastructure and development is very positive for property prices in the area.
How?
To participate in this property investment thematic, one doesn't need to have a huge amount of capital. As mentioned before, if you pool your funds into a club deal or fund structure, you would easily be able to get some high quality property for as little as USD100,000 each. Another alternative strategy is to take on long-term leasehold property and sub-let to a self-storage tenant. In this instance, the returns can be much higher, however one must remember that you don't actually own the asset and therefore do not participate in capital appreciation. But the up-front capital commitment is lower and the returns potentially higher.
Dan Vovil is an experienced investor who purchased his first property at age 17 and by 32, he has achieved financial freedom. Now he spends his time based in Hong Kong advising Australasian HNWIs and family offices on managing their investment portfolios.