This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on May 9 - 15, 2016.

Investors looking for new options in the real estate industry could consider alternative segments such as self-storage facilities. According to the Asia Pacific Investor Intentions Survey 2016 released by CBRE Research in March, there is growing demand for such facilities in densely populated markets where per capita living space is small.

The self-storage segment is poised to expand fast in Asia, especially in major cities with limited household space, such as Hong Kong, Tokyo and Singapore, says Dennis Yeo, CBRE Asia’s managing director of industrial and logistics, in a telephone interview with Personal Wealth. The segment has a rosy future, he adds.

“While self-storage is a mature segment in the US and the UK, it is relatively new in this part of the world and there aren’t enough players yet. I think first movers will have an advantage and it is a good alternative to industrial investment,” explains Yeo.

He says investors could be looking at double-digit returns from the self-storage market in Tokyo but that would not be the case for other Asian cities like Kuala Lumpur. Another study released by CBRE Research in June 2015 shows that for sub-leasing properties over a 10-year period, the internal rate of return is 30% in Singapore, 26% in Tokyo and 23% in Hong Kong. However, these returns are attached to key assumptions, such as a 90% stabilised occupancy rate (with a four-year stabilisation period after a one-year construction period); 4% to 5% self-storage rental growth per year; 100% equity; a 55% to 75% space efficiency rate; and a 10% to 15% underlying rental increase for the leased property.

Although the economy is spiralling downwards and industrial activity is slowing, the self-storage segment will not be greatly impacted as there is strong realistic and industrial demand, especially in major cities where land is scarce, Yeo points out.

“Residential users who need self-storage facilities are usually those who need extra space to store their items or who are renovating their homes. The latter group may continue to rent the units as they may  want to continue keeping some items away [in storage]. 

“Studies have shown that it is highly likely that these people will continue to use their self-storage units even after the renovations are completed because the service is so convenient,” he says.

According to Yeo, the biggest driver of self-storage growth is the commercial user, such as small entrepreneurs and those who run online businesses.

“These entrepreneurs buy in bulk and trade on the internet, so they will need a place to store their merchandise. This is where the self-storage business will get the biggest piece of the pie, thanks to how technology has changed people’s lifestyles,” he says.

“Self-storage facilities are the virtual shopping centres of the future, where people will place their orders online and the merchandise is managed and dispatched from the self-storage units by third-party logistics agents, [thereby] eliminating the need for a physical shop and salespeople.”

As Asian society becomes more affluent and sophisticated, self-storage operators could venture into niche markets, such as wine-storing facilities for collectors, and earn much higher returns from the business. The returns are approximately 20% higher than regular storage facilities, Yeo notes.

Yeo says the most important feature of self-storage warehouses is that they can also be showrooms. “This is for customers who prefer to see and touch the items before they buy them. The cost of doing business will still be lower than operating in a mall. There will be strong demand for self-storage facilities in the future for this reason.”

But he also admits that this model will only work in cities like Singapore and Hong Kong due to the scarcity of land. In countries where land is not an issue, demand for self-storage facilities will hinge on residential users.

“Even in countries like Vietnam and Malaysia, space in the city centre is relatively more expensive and limited. When living space in the city gets smaller, self-storage becomes the solution for people who have items that need to be stored away from home,” explains Yeo.

A CBRE study in June 2015, entitled “Asia self-storage — demographic changes drive demand for self-storage space in Asia”, shows that four factors — death, divorce, downsizing and dislocation (job change, marriage, college or natural disaster) — as well as business activities are considered the key drivers of demand for self-storage space.

The study says the next destinations for self-storage will be major cities like Shenzhen, Shanghai, Beijing, Taipei, Kuala Lumpur, Manila and Bangkok.

“These cities are experiencing similar demand drivers — tighter living spaces due to urbanisation, strong job growth and other dislocation events, and a growing office market — as more developed Asian cities.”

However, the study also points out that there are three key risks — overall lack of awareness of self-storage, scarcity of suitably located properties and short lease terms and land tenure in Asia.

The second risk cited can be easily overcome as self-storage facilities only require a small space in multiple locations to operate — the top floor of a parking facility or office building in the city centre will make good self-storage spaces because of the easy access and convenience.

Given the relatively brief history of self-storage in the region, Yeo says lack of awareness takes more time, education and marketing strategy to tackle.

“When it comes to the problem of short lease terms in Asia, the self-storage segment has a lot to learn from the serviced office sector, which has matured over the years. [The operators] need to know how to sign long-term leases and cap the rent to ensure the sustainability of the business,” he concludes.

Other vehicles that offer exposure to self-storage

 While the Asian self-storage market is still developing, investors can consider other vehicles to enjoy a piece of the pie. In Asia-Pacific, Australia’s Pioneer Investment Group launched the Pioneer Self-storage Fund last year. The fund holds a self-storage property portfolio consisting predominantly of well-established properties with a proven trading history across diverse geographical locations.

While the targeted annualised income return on investment for fund investors is 6% per annum (before tax), the company’s senior accountant Luke Storey says in an email interview with Personal Wealth that it is confident the self-storage fund will be able to provide investors with double-digit returns as the market continues to develop.

“The fund currently invests in Storage King, Australia’s largest self-storage company with locations throughout Australia and New Zealand. At this stage, we have no plan to expand the fund’s portfolio to Asian countries as we are not experienced in those markets.

While the fund is offered to those who live in Australia, Storey says they do allow foreign investors to place their funds with a minimum investment amount of A$500,000. However, this is subject to the company’s approval.

There are also some publicly traded self-storage real estate investment trusts (REITs) listed on the New York Stock Exchange, including Public Storage (NYSE: PSA), Extra Space Storage Inc (NYSE: EXR) and Sovran Self Storage Inc (NYSE: SSS), which have given investors impressive returns.

According to Morningstar, as at March 31, the aforementioned REITs provided total returns of 29.07% to 43.37% over a one-year period and 22.18% to 37.24% over five years. They outperformed the REIT Industrial and S&P 500 benchmarks over the 10-year period.

Yeo says Asian countries are still far from forming a self-storage REIT as it requires economies of scale. Currently, none of the self-storage players in the region is large enough to own several buildings meant only for self-storage and form a REIT thereafter.

But he notes that there is potential for consolidation in the future, when big players acquire the smaller ones, which will benefit both parties. The business can be publicly listed and investors can invest in it by buying the company’s shares. Sophisticated investors could buy into self-storage through private equity too.

“While Asia is 20 years behind the US in self-storage, I don’t think we will need the same period to mature. The developmental phase in Asia will be shortened drastically, thanks to the proven operational and business models in the US and the UK,” says Yeo.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.