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Self-storage has boomed since it first came to Britain in the 1980s, and there is plenty of room for more growth, which means opportunities for investors. Rachel Robson boxes clever and picks some potential winners

When it comes to real estate at the moment, the instinctive reaction would be to say it is a no-go area. On the face of it this certainly seems to be the case, even though in January it was the best-performing sector. But underneath the turmoil and chaos we have seen over the past year, are there some pockets of value to be found lurking in the corners?

One area that could be worth investigating is the self-storage market. The idea behind self-storage originated in the US, and first appeared in the UK in the early 1980s when it was only found in London. Since then it has grown substantially and has spread across the UK, although the largest concentration of centres is still in London and the south east. There are now more than 250 operators – some large multi-centre companies, such as Safestore (SAFE), Big Yellow (BYG) and Lok’n Store (LOK:AIM), Access, and Space Maker, operating more than 235 centres between them, while others are single-centre independent enterprises.

Despite this growth, the UK market is still relatively immature compared with the US and Australia where the market has expanded significantly over the past 40 years. As a result, most analysts are currently fairly bullish about the outlook for the UK self-storage sector.

The UK Self-Storage Association estimates the UK market is growing at around 15% a year. The main drivers are market trends such as a rising number of people living alone, an aging population and housing stock pressure. Domestic customers make up the majority of users, but businesses and students are also important. Centres offer both short and long-term storage, so they are convenient for a range of circumstances – while moving, decorating, travelling, or simply to reduce clutter. And customers don’t need to worry about security, as many facilities are equipped with 24 hour CCTV, PIN code access and customers being the only key-holders to their storage rooms.

Few listed companies

Although there are many self-storage operators in the UK, only three have so far joined the stock market. Safestore was the first to list, joining Aim in 1998. But the group de-listed in 2002 following a £39.8 million management buyout led by chief executive Steve Williams. During the next five years, the private company expanded rapidly and floated again in March 2007, this time on the main market. The group now has more than 39,000 customers and 104 stores, and also a firm base in Paris under the brand Une Piece en Plus.

Big Yellow, meanwhile, floated in 2000 and operates 44 stores in London and the south, and one in Leeds, with a further 28 stores in development. It is perhaps best known for its bright (yes you’ve guessed it) yellow insignia. Centres are commonly on main roads, with most inside the M25 or other conurbations. Last May, the company also signed its second international franchise agreement in the Kingdom of Bahrain with Big Yellow FZ, which also holds the group’s franchise in Dubai. The company is not investing capital in this business but provides the operating know-how and the licensing of the Big Yellow brand for an upfront fee and a share of future revenues.

Lok’n Store also joined the junior market in 2000. It opened its first store in 1995 in Horsham and has grown dramatically since then, with its first purpose-built store opening at Farnborough in 2006. It now boasts a total of 23 stores, which all carry Lok’n Store’s orange branding.

Overcoming obstacles

For the UK self-storage market to continue its rapid growth, customer awareness must improve. It i is much better than it was ten years ago, with brands becoming more recognised, as signs adorn the sides of busy main roads. Yet awareness is nowhere near as high as it is in the States. ‘In the US, one in nine adults are using self storage and 90% of adults have used it at some stage,’ says Lok’n Store chief executive Andrew Jacobs. In comparison, he adds, ‘On an anecdotal basis, I would guess that not more than one in ten UK adults really know what self-storage is.’

Improving customer awareness goes hand-in-hand with suitable location. If a store is tucked away in the middle of nowhere, chances are very few people will know about it and occupancy levels will be tiny. Instead, sites need to be located on main roads or at destinations such as supermarkets. Visibility is also important (hence the bright colours in company branding). Finally, sites must have good access.

Thanks to competition for land and supply constraints, selecting a new site for a self-storage centre is not always straightforward. Firms have to compete not only with each other, but also with office, hotel, residential and retail developers. However, competition has yet to faze the likes of Big Yellow, Lok’n Store and Safestore. Safestore’s chief financial officer Richard Hodsden says the UK market is far from being competitive because it is still so immature. Furthermore, if one self-storage company has set up in a particular area, this does not act as a deterrent to other companies. Rather, the opposite appears to be true. Analysts at Hardman explain that ‘there is little evidence that the opening of a store by one company shuts out opportunities for others. Self storage appears to be an industry where extra competition expands the size of the market.’ In highly populated areas such as Battersea in south-west London, where housing space is constrained, demand is so high that even though there are a many self-storage centres in the surrounding area, every store is said to be trading well.

Another problem is planning permission, according to KBC Peel Hunt analyst John Cahill. ‘Local councils don’t like granting planning permission for self-storage facilities because they do not provide many jobs for the community.’ Yet ‘I have not known of a case where a company couldn’t get planning permission,’ he adds.

Facing the crunch

So how has the self-storage market faired in the recent credit crunch? Generally speaking, experts at the UK Self Storage Association say that in more mature markets, the self-storage sector has continued to grow through several economic and housing downturns, and this has also been echoed in the UK and Europe. ‘The number of new customers using self storage tends to be lower during a housing downturn... the average length of stay tends to increase compared with a strong housing market, as the nature of demand changes,’ they explain.

Figures from the 2004 and 2006 Self Storage Association Almanac support this, revealing that between 1990 and 2006, the occupancy levels in the US self-storage market continued to remain above 80% regardless of economic conditions.

Cahill agrees the self-storage market is more resilient than people realise. ‘If there is a downturn in the residential housing market, people think the self-storage market will struggle,’ he says. ‘This rests on the assumption that people only store their belongings when moving house. But this is not the case, as people use self-storage facilities when they have not got enough space at home.’ So demand for self-storage is expected to remain healthy. Cahill also points to a further argument that suggests people will not move into bigger properties if there is a housing downturn, and rather than moving house, may decide to declutter their homes to make better use of the space available to them. Also, housing chains can break up, causing people to move into rented accommodation and therefore require extra storage space.

Yet this is not to say that the self-storage market is immune to any market downturn. The recent housing slump has prompted some companies to admit trading conditions are more difficult. Big Yellow acknowledged at its interim results and following interim statement that trading conditions had been more challenging and that visibility of its trading performance is limited.

However, Safestore’s Hodsden points out that it is currently difficult to establish the full impact of the credit crunch because Q4 is typically more challenging due to seasonal issues, which lead to a drop in occupancy.

What is clear is that many of the bigger companies believe that to an extent, the credit crunch will provide opportunities, as some smaller independent companies have been forced to fold, providing the more resilient companies with opportunities to take advantage of the vacancy left behind. Start-up companies are also struggling to obtain the financing they need due to tighter lending conditions and as a result, they cannot progress with their business plans.

Safestore believes that current market conditions ‘will be in favour of well-branded self-storage companies that have good covenants and solid earnings growth, enabling Safestore to purchase land and property at a level which provides good returns while further increasing the barriers to entry.’ Chief executive, Steve Williams, adds, ‘While the broader economic environment is uncertain, Safestore has a resilient business model, strong operating skills and a high-quality asset base, which will underpin our performance.’

Big Yellow’s chairman Nicholas Vetch holds a similar view. ‘Historically, the lack of available sites has acted as a significant barrier to the creation of new purpose-built storage centres. We believe that more challenging financial markets will add a further significant barrier except

for the best-capitalised companies with well-established track records,’ he says.

Most analysts also remain fairly upbeat about the prospects for larger self-storage companies because ultimately strong demand should continue to drive growth. Some people may have to tighten the purse strings and therefore paying for self-storage facilities will no longer be an option, but for others, this won’t be the case. As chief executive of Big Yellow James Gibson points out, people will still be having babies, getting married or divorced, and will therefore still need extra storage space, no matter what else is going on in the world.

Many self-storage companies also have other cashflows besides those specifically related to real estate, with most firms selling packaging supplies such as boxes, bubble wrap and packing tape, as well their own content insurance. For Big Yellow, the packaging and insurance sales combined make up around 11% of revenue, while for Safestore it is around 12.5% and for Lok’n Store around 8%. Big Yellow says around 90% of customers buy their insurance through the company. Granted, these may not be huge percentages, but they still add to the revenue stream.

Big Yellow is also exploring a new initiative at its new store in Fulham (to be opened in March) which, as well as the usual self-storage area, will house a wine cellar in the basement. This will provide wine enthusiasts with a place to store cases of wine in a temperature-controlled environment. The idea has already proved very popular in Australia, New Zealand and the US.

Rewards of patience

So self-storage market has some bonuses. Investors may have to wait before they see these benefits and the sector will not remain completely immune to a housing downturn, but the market is pretty resilient and the UK is currently so under-supplied that growth potential is still huge. KBC Peel Hunt’s Cahill is bullish, particularly Big Yellow, which, he says, is well managed and strong. He acknowledges the risks of obtaining planning permission and ensuring that the sites are sufficiently occupied, but as a whole, he believes the sector is a good longer-term investment, even in these volatile times.

Similarly, analysts at Merrill Lynch have selected Big Yellow as one of their preferred stocks because they believe ‘self storage is more defensive and less cyclical than the wider real estate sector.’ Meanwhile, Citi analysts add that although Safestore is listed as a property company, ‘it is really a hybrid property-retailer, focusing on maximising returns from letting rooms in its storage facility.’ They add, ‘Unlike the real estate sector, it exhibits strong growth.’

Of course, ultimately growth through land size will become more stilted as supply becomes more constrained. ‘We expect that as competition between self-storage companies increases, and the supply/demand balance reaches equilibrium, that the value increases on both developments and operating stores will decrease,’ say Citi analysts. But when you consider that some experts are expecting between 2,000 and 3,000 stores eventually to be in operation in the UK, and there are currently only around 680, this seems a long way off. And once this does happen, consolidation is likely to come into play.

With sufficient demand in the market to keep fuelling growth for the foreseeable future, self-storage companies will continue to expand, and with a bit of luck, their share prices will improve. This in turn will mean that investors could potentially be sitting on some juicy profits.

ROOM FOR GROWTH: THREE UK STORAGE COMPANIES

Big Yellow (BYG) 424.8p

Market value: £489.7 million

PE: 31.8

Relative strength: 1m 1.8% 12m -31.5%

Joined the stock market in 2000. To date the group has purchased 65 stores of which 45 are now open. When fully built out the portfolio will provide over 4.1 million sqft. of storage space. Most of its stores are owned freehold and 38 are located within the M25. Big Yellow plans to open six to eight stores a year. Converted to a real estate investment trust (Reit) in January 2007.

Lok’nStore (LOK:AIM) 188p

Market value: £49.6 million

PE: n/a

Relative strength: 1m 7.7% 12m -12.5%

Floated on Aim in 2000. Before that it was on the Ofex market since 1997. Around 60% of its customers are households and 40% business. In February 2006 it opened its first purpose-built store and a new head office at Farnborough. Last April, Lok’nStore crashed through its one million sqft target by acquiring a new-build site in Harlow. Of its total estate, 63% is freehold.

Safestore (SAFE) 160p

Market value: £301 million

PE: 15.8

Relative strength: 1m 10% 12m n/a

Joined Aim in 1998, but later de-listed. Floated on the main market in 2007. Its principal operations are located in the UK, where it has 84 stores, with a further 20 stores in Europe. Plans to open seven to ten stores a year. Contemplating converting to a Reit at some stage, which could provide further upside.