Foreign Funds Invest in Self-Storage

Self-storage facilities are called “trunk rooms” in Japan. This type of asset is starting to draw attention from investors. Self-storage facilities can be expected to be used for relatively long periods of time, but the most attractive feature of these alternative assets is their stable profitability.

June 20, 2019

Developed as a core asset in the U.S.A.

The indoor self-storage market appeared on the scene in Japan in the 1990s when warehouses and logistics companies started to rent out their unused spaces. This also applies to outdoor self-storage using large containers like those used for cargo shipments, but such outdoor self-storage is not user-friendly, and now indoor self-storage is the norm. According to major Japanese “trunk room” operator Quraz’s Annual Supply Survey, the size of the self-storage market—including both indoor and outdoor facilities—has doubled since 2008, and now exceeds 50 billion yen. It is estimated that the scale of the market will exceed 70 billion yen by the year 2020. However, according to Pelham Higgins of the JLL Japan Capital Markets Department, an expert on alternative asset markets, “In the U.S., which has the largest self-storage market in the world, there’s about 7.5 square feet of storage space being used per person. In Australia, which has the second-largest market, 1.2 square feet of storage space is being used per person. The ‘trunk room’ market in Japan is growing, but there’s still only 0.08 square feet of storage space per person being used.” In the U.S., self-storage has established itself as a core asset. According to Stansberry Churchouse, in the U.S. REIT market, REITs specializing in self-storage have performed excellently, standing out among all specialized REITs with total returns of 15.8% from 1993 to 2017.

Though self-storage is still only a minor presence in Japan, it is one of few assets from which we can expect growth. According to Higgins, “Single-person households are increasing in urban areas, but residential floor space is generally small. The need to temporarily store excess belongings in self-storage facilities is growing. And in an aging society, elderly couples whose children live independently are more likely to move to homes of a size in keeping with their lifestyles. If you can’t fit your stuff in your house, you need to store it in a self-storage facility. These factors are likely to boost demand for self-storage facilities.”

Attention from foreign funds

The one who opened up the market for investing in the Japanese “trunk room” market was Quraz, mentioned above. Major U.S. real estate investor Evergreen Real Estate Partners LLC acquired Quraz in 2013 and accelerated its buying of real estate assets. However, Japanese operators generally lease or manage facilities, not own them. The norm is to approach landowners and building owners with proposals for “trunk rooms” as a way to use vacant space effectively, not as products to invest in. Quraz was an operator, but also owned its own real estate, which made it a unique presence that encouraged the growth of the industry. According to Higgins, “Using the growth of Quraz as a reference, foreign institutional investors like CapitaLand, Blackstone, and Heitman are starting to actively invest in Japan’s ‘trunk room’ market. Some companies follow Quraz’s investment scheme, but we’re starting to see cases where they sign management contracts with Japanese operators. Also, a prominent institutional investor has decided to invest five billion yen in the development of self-storage facilities in cooperation with a local asset management company, which ultimately led to a war over the makeup of Japanese self-storage REITs.” He expects things to heat up behind the scenes.

Development NOI at least 7%

A billion yen per property is the asset size that institutional investors are aiming for. Private sector investors are drawn to small properties, worth between 200 and 300 million yen, managed by the local operators. In the U.S. and Australia, for example, roughly two billion yen is the standard. Their attractiveness as investments lies in the fact that higher returns can be expected from them than from core assets like offices, commercial facilities, homes, and logistics facilities. Plus, the contract periods for users of the facilities are relatively long, and investors see that stable cash flow as a big advantage. Many indoor self-storage facilities are buildings that were once offices or warehouses but have since been renovated and repurposed, but they can expect an NOI of 7% at the time of development. New buildings can expect a yield of around 5%. “These advantages to investing in ‘trunk rooms’ are inspiring many investors to reach for their piece of the pie. Fifteen years ago, logistics facilities were an emerging sector, but now they’re a core asset. It looks like self-storage facilities are going to follow the same path,” says Higgins, with high hopes for the future.