Ian Battersby, Business Development Director at Seneca Partners, looks at whether managed storage could provide the next opportunity in asset-backed investing.
The demise of ‘renewables’ as an EIS-qualifying business is now largely yesterday’s news but with substantial sums having been committed by investors to this asset class in recent tax years, advisers are challenged to find trading businesses which benefit from genuine asset backing as a possible alternative.
Investors who have dined out on renewables will see a significant hike in risk when moving to growth capital EIS investments and though the returns can be much more substantial, the downside can be a risk too far for some.
Managed storage is growing in popularity as an acceptable bridge for many investors who clearly recognise the benefits of investing in businesses which have tangible balance sheet assets. These businesses which trade from freehold or long leasehold premises and which underpin the trade itself can provide a strong degree of comfort for investors should things not ultimately pan out as planned.
So, why might managed storage be a compelling option?
Managed storage is an industry where a company manages a storage solution, which is provided for domestic and commercial customers. The business provides secure rooms or areas, in which customers can store their goods.
There are estimated to be over 60,000 storage facilities worldwide, of which 48,500 are located in the United States. From 2000 to 2005, over 3,000 new facilities were built every year with one in 10 U.S. households now renting storage space.
While the US is by far the world’s most mature storage market, recent growth in other territories has been strong. Managed storage arrived in the UK in the early 1980s and demand has grown steadily since then, with the UK market now supplying over 37 million square feet of storage space, an increase of more than 5% on 2014. It is estimated that the total turnover of the industry in 2015 was c.£440 million. The industry has proven to be counter cyclical and recession resistant with many operators reporting year on year revenue growth through the recent recession.
Managed storage businesses have proved to be an attractive option for investors looking to capitalise on increasing demand for storage solutions resulting in continuing, solid growth in this sector of the economy. The low level of fixed operating costs in the industry together with the large number of alternative uses for the underlying assets, has also provided an element of downside protection to their investment. Economic data and trends analysis suggest there is significant headroom for growth in the short and medium term.
Growing demand
The primary drivers of retail storage demand are generally social factors such as moving home, marriage, divorce, retirement and bereavement. For businesses, storage proves useful for a number of reasons including start-up workspace solutions, storing archives, stock or office equipment. Increased public awareness of the industry has also contributed to its growth, as has the surge in demand from online traders; eBay trading is quickly becoming a sector in its own right.
Current lettable occupancy rates across the UK are estimated at 73%, a 4% increase on the previous year, despite new, additional capacity, which indicates that currently demand for the product is growing slightly faster than supply, while yields per square foot have also been improving in recent years.
Smaller houses and an increase in the number of post-recession housing transactions have contributed to an increase in domestic demand while higher business rates have made managed storage a cost efficient option for businesses in general.
Investors generally cite five key reasons which combine to create the appeal for them:
- Storage business models have proved resilient through the recent financial crisis
- Managed storage has good customer diversity: it does not rely on one single, large customer
- Stable and relatively secure cash flow (recurring earnings)
- Low and relatively predictable operating costs combined with attractive rental prices per square foot (compared to the leisure and healthcare sectors)
- Investment is usually underpinned by the businesses trading from freehold or long leasehold premises giving a level of downside protection to their investment
What are the risks?
As a sector of the economy, the macro appeal for EIS investors is clear to see but this is not ‘renewables‘ in different clothing and investors ought to make it their business to understand the investment risks. The inherent asset backing will inevitably appeal strongly but unlike ‘renewables’ where the management of the investment was naturally rather more passive, managed storage depends on some key trading deliverables.
The knowledge and expertise of the operator of the managed storage sites is always crucial not only in the marketing and management required to drive occupancy levels but also in terms of geographical selection.
Selecting sites where there is population density, good arterial access and little or no competition may seem fairly obvious but acquiring at correct value will be critical to the investment outcome. This takes on more relevance because a greater portion of the investment budget goes towards the cost of establishing the site which ironically is where investors will see their safety net. Logically, sites which have good alternative uses offer better prospects in that regard. Investors might also prefer exposure to a portfolio of sites rather than single site exposure.
Additionally, in the context of an EIS investment of this type, high levels of gearing should probably be treated with caution. While theoretically, gearing may accelerate returns for investors it may also quickly erode equity in the event of any downturn in property values and with EIS investors holding ordinary shares the prospect of sitting behind a lender would rank as a negative for many, especially those who attach a strong degree of comfort to the asset backing.
There is much to like about managed storage as an asset class and it is easy to see how it will appeal to investors who are seeking to bridge the gap between previous investments in ‘renewables’ and the generally higher stakes involved in growth capital investing. But there will never be any substitute for selecting an investment manager with pedigree, capability and thorough due diligence processes given that offers are likely to vary significantly between one product provider and another.
