What’s behind the self-storage property boom?

The self-storage property market is thriving, both locally and globally.

What’s behind the boom? What about spiking inflation and interest rates? Will these fuel more South Africans downscaling and thus requiring more self-storage space?

On this episode of The Property Pod we are joined by Gavin Lucas, CEO of Stor-Age to give us some insight. He has been head honcho of the only JSE-listed pure-play self-storage property fund since its listing in 2015.

Stor-Age has been one of the top-performing listed property funds since listing, and has expanded beyond SA’s shores into the UK self-storage market.

Highlights of his interview appear below. You can also listen to the full podcast above or download it from iono, Spotify or Apple Podcasts.

Gavin Lucas, seen in this photo from back in 2015 – the year the group listed on the JSE. Image: Supplied

Highlights

“The story of Stor-Age is a wonderful story. It’s a good South African story of success, of entrepreneurial success.”

“[Where] the story starts … I was probably heading towards the back end of my first year of my accounting articles, which I completed here in Cape Town. I’m a chartered accountant by profession. I quickly realised, as I was starting on my journey of doing my articles, that working as a professional in that field was never quite going to be enough for me.”

“My dad had a background in construction and property administration. He had been in construction for more than 30 years and then rounded off his career with approximately 10 years in property administration. Around the time that I was doing my articles – this was 2003/2004 – the property market generally speaking was starting to bubble and, perhaps with my dad’s influence as well, I started to take note of that.”

Read: Safer than houses: Stor-Age Property Reit

“Towards the back end of the first year of my articles, I pitched an idea to my dad, who wasn’t working at the time, and [to] my older brother, Steve Lucas, who’s the financial director of Stor-Age … I was following in his footsteps in terms of working towards becoming a chartered accountant. By that stage he was already working in London as a chartered accountant.

“I pitched this idea to them [Steve and my father] essentially to leverage my dad’s property skillset, construction skillset and property-administration skillset, as well as my older brother’s, to potentially get them to invest some after-tax earnings in sterling back into South Africa – and they both liked it.”

“It just so happened that one of the first opportunities that we identified [was] to do a property development. Our idea at the time was to do a light industrial business park. It was in a suburb where I grew up in Cape Town called Edgemead in [the] northern suburbs.

“After a bit of preliminary research, very high-level research, this opportunity to develop the site as a self-storage facility presented itself. We to-and-fro’d and, to cut long story short, we ended up developing that property as a self-storage facility.”

“We came from humble beginnings. Both my brother and I put ourselves through university with student loans and [the] like. There were certainly no trust funds around in our family dynamics. What we did was we came up with an innovative model to fund that development where we were, I think, the first in South Africa to sectionalise a self-store facility.”

“We pre-sold approximately two-thirds of that scheme off-plan. We did it in three separate phases. We used those presales as the security with Standard Bank to essentially fund the development.”

“What we then did, as the developer as well, we put [in] all of our own profits, we left it in the scheme and we then gave those sectional-title properties, together with the third-party investors, the opportunity to participate on an ongoing basis in a rental, which was managed by a company called Stor-Age. And that’s how Stor-Age was born.”

“It was a third-party, self-storage management company which then operated that facility on behalf of the owners, which included ourselves as the developers.”

Researching self-storage

“That set about a journey for us of doing a significant amount of research, in particular in the first-world markets of the US, Australia and the UK, to learn about this product called ‘self-storage’.

“One of the key takeaways that we got from that was we learned how to do an industry study. The tell-tale sign of a genuine market opportunity is very often when there is no hard data available on a particular sector.”

“So we learnt how to do an industry study. We travelled around, staying in the country over a number of months, staying in Formula 1 hotels. We were on a very low budget and I’ve got great memories – and fond memories – of it now, [with us] posing as customers.”

“We identified [self-storage operations] using the Yellow Pages, which at the time was the predominant source of new enquiries for self-storage facilities. That’s where the existing operators did most of their advertising. We sourced Yellow Pages books from around the country covering South Africa’s six main cities. We identified 120 self-storage properties in South Africa.”

“We then actually went and visited every single one of them. The information that we gleaned from visiting those properties, each on their own, was not perhaps particularly insightful or powerful. But when we put all of that information together it told us a very, very powerful story.

“It had allowed us to talk with a lot of confidence and conviction, certainly when we looked at what had taken place in the self-storage sector in the likes of Australia or the UK or the US. It allowed us to understand what we believed would play itself out in South Africa over the next two or three decades. It just so happens that we are now almost two decades later [when] to a large extent, a lot of that has played itself out.”

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“So what we did was, after putting that – if you want to call it a kind of a strategy piece – on the sector in South Africa, we essentially put together a business plan which sought to position ourselves optimally, as we believed, [with] capital from more formal established pools, such as the listed space.”

“We wanted to access the sector, and other property developers wanted to access this sector, so we wrote the business plan to position ourselves optimally to be able to tap into that. Looking back, 16 years later, it’s played itself out pretty much verbatim.”

What about the listing of Stor-Age and the growth since then?

“We listed the business in November 2015. November this year will be our seven-year anniversary from having been in the listed space.”

“Stor-Age is one of only 11 publicly traded self-storage Reits [real estate investment trusts] globally. We were the first – and we still are – the only self-storage real estate investment trust which is listed across any of the emerging markets globally.”

Read: Stor-Age debuts on JSE

“In that period, we’ve grown the property portfolio from 24 properties to 85 properties today, with a further 15 properties in the pipeline. The portfolio is split, with 55 properties trading in South Africa and a further 30 properties trading in the UK.”

“By value, the business has actually gone through the R10 billion mark in terms of the total value of properties in our portfolio. That includes properties which are joint ventures in the UK.”

“In fact, by value the business is now larger in the UK than it is in South Africa.”

“I think there are many factors which have contributed, and have allowed us to be successful. But one of them that really stands out for me is that Stor-Age is a highly strategic business. We do our planning in five-year tranches.”

Long-term game

“We are currently in the third such plan, which will take us to 2025. Real estate or property is a long-term game. Where you want your portfolio to be in five or seven years’ time you need to understand that very clearly today. Albeit those strategies being quite broad, they are also very detailed.”

“So in both the UK and South Africa we know exactly in which cities and suburbs we want to place our product, or [where] we want to buy existing stock. Perhaps that’s a bit more pertinent in the UK, where the markets are a bit more evolved and a bit more mature than in South Africa.”

Why has self-storage become so popular and is in fact continuing to boom?

“The property market in the built environment continuously changes. It evolves in response to the needs of society. And, quite simply put, all self-storage is the property market’s response to the needs of society.”

“We live in the age of capitalism and consumerism, where people have access to credit to a far greater extent than previous generations … This applies globally. As a consequence, people have been acquiring more and more goods.”

“Whether people like to admit it or not, people become attached to their stuff; their stuff is very important to them.”

“At the same time what we have and what we see playing itself out globally – sure, to a different extent in different countries – is the densification of people’s living and working spaces. At the same time you have an upwardly mobile population.”

“What then happens is, and what drives demand for our product, [is that] approximately 70% of our demand and customer base, you and I in our personal capacity, whenever there’s a life-changing event it drives demand for our product.

“That life-changing event can be positive or negative. On the positive side, you might be doing renovations or alterations at your house … You may be having a baby.”

“On the negative side, there could be a bereavement, there could be a separation, for example. What then happens is people need to put their stuff somewhere and people’s stuff is really, really important to them. As a result of this, it drives a very strong need for our product.”

“The balance of demand comes from the commercial segment. Typically small and medium-size enterprises and SMEs – and not just SMEs but businesses – love the product.”

“The reason they love the product is because of its flexibility in terms of the underlying unit sizes. So it can be anywhere from a three square metre unit up to 30 square metres. And the flexibility of the lease contract – in theory the leases are as short as a month.”

“So they can upscale and downscale not only their space requirements, but also they’re not locked into long-term leases. So it gives businesses a lot of flexibility and it allows them to scale their businesses in accordance with their cash flow requirements, and in terms of the underlying space requirements relative to where their business is at on that journey.”

“Within any given catchment area, relative to the number of people living within that catchment area, there are always a set number of life-changing events taking place whether the economy is booming, growing or contracting.”

“People’s life-changing events don’t know the economic cycle, and this is what allows self-storage to trade so well through different economic cycles. Fortunately we’ve been a beneficiary of that.”

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September, which is known for spring and the spring-cleaning part of the year, is almost upon us. Does Stor-Age see an uptick in demand during this part of the year?

“You’re quite correct in your initial assumption there, so you certainly aren’t being cheeky at all. Typically self-storage varies from country to country, depending on the severity of their seasonal weather patterns.”

“In South Africa, yes, we have a mild climate, but what you typically tend to see is higher demand for the self-storage product in the spring and summer months, and demand typically would taper off a little in the winter months.”

“Now in South Africa we don’t see the seasonal impact playing itself up nearly to the same extent as we do for instance in our UK market, where [the weather] does tend to be not quite as mild – certainly summer relative to winter and so on. So what you tend to see in the winter months in the UK [is] definitely a slowdown in demand on that side.”

“But the converse of that – with our portfolio being so nicely distributed and weighted between the two markets – [is] you see that being offset by slightly stronger demand coming through the South African business, and the converse in the South African winter and the UK summer …”

Will higher interest rates fuel more South Africans downscaling and requiring more self-storage space?

“Well, to unpack that, to go back to some of my earlier comments, self-storage trades well throughout the different economic cycles, because to such a large extent it’s driven by the underlying need which arises from those life-changing events. So whether the interest rates are going up or they’re coming down, those life-changing events continue to happen.”

“On the commercial front [it’s] the flexibility. So if some businesses are going to have to scale back or they’re under a bit more pressure, again our product tends to do quite well.”

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“Indirectly I don’t think that we would see any noticeable impact in terms of our trading dynamics – and that was where the ‘indirect’ comment came in – ultimately these factors do play themselves out in terms of the overall economic performance. So directly perhaps no, but indirectly over a slightly longer period of time, yes, you would see it playing itself out.”