Whether you are buying or selling a self storage facility, it is important to understand what drives value, or more specifically, the price you can expect to pay or sell for.

Self storage offers steady cash flow (return) and capital growth (value growth) potential. However, not all storage facilities are created equal, and a thorough analysis of key metrics is crucial before buying or selling. Here are six essential metrics to consider when evaluating a self storage investment in Australia.

1. Market Supply and Demand

Conduct a market analysis to determine the local supply and demand fundamentals for self storage units. At Four Leaves, we call these Catchment Studies, as it entails undertaking a full analysis of the primary customer catchment surrounding the facility.

A Catchment Study seeks to investigate the level of self storage demand by understanding the demographic profile of the likely customer catchment area, and overlaying this with the level of existing and proposed self storage competition. It includes investigating the future likely demand against the future likely supply. Tools like the Australian Bureau of Statistics / Stats NZ and local council data can provide valuable insights into indicators of increased future demand, such as forecast population growth and housing trends. Planning application records and industry publications, such as those available from the Self Storage Association of Australasia can assist with identifying new self storage supply.

2. Occupancy Levels

There are two key metrics to revenue performance. Occupancy levels and fee rates.

Occupancy, measured by area occupied over total area available, is a relatively consistent metric across the self storage market. It is therefore the more straightforward revenue metrics to monitor and compare. A high occupancy rate generally indicates strong demand in the area, but it is also essential to understand the balance between occupancy and asking rates. A low occupancy level within a mature self storage facility could suggest that the asking rates are too high. On the other hand, a facility that is operating at 100% occupancy suggests that asking rates are too low.

As a rule of thumb, a facility that can maintain a stabilised occupancy level of circa 90% (or say between 85% to 95% depending on size) suggests that storage units are not underpriced and still have room for growth.

3. Storage Fee Rates

The other lever for revenue performance is storage fee rate, or more commonly referred to as average storage fee rate. It is calculated by dividing monthly revenue by area occupied. It is expressed as a monthly average storage fee rate, or it can be annualised to produce the average storage fee rate per square metre per annum.

Average storage fee rates vary tremendously across the market. There is no rule of thumb for the target average storage fee rate within a facility as it is influenced by a range of factors such as the facility’s unit mix, the occupancy and build up status of competitors, the supply rate within the customer catchment area, and the demographic profile of the catchment. There are industry benchmarks available through various research publications, such as Cushman & Wakefield’s Self Storage Performance Indicators series.

4. Revenue Per Available Metre (RevPAM)

As there is so much variance with occupancy levels and fee rates between facilities across the market, the RevPAM measure allows for a joint occupancy and fee rate performance metric.

RevPAM demonstrates how much revenue each square metre of Net Storage Area (NSA) generates on average. It is calculated by dividing the revenue of a facility or region by the total available NSA, and it is usually expressed as an annual rate per square metre.

A higher RevPAM indicates better income potential and operational efficiency. RevPAM is a good metric to compare with industry benchmarks, such as those published within the Self Storage Association of Australasia’s State of the Industry Report which is available to SSAA members.

5. Net Operating Income (NOI)

Net Operating Income, which can sometimes be referred to as EBITDA (Earnings Before Interest Tax, Depreciation, and Amortisation) is a measure of the facility’s profitability. It is calculated by subtracting operating expenses from the total revenue. A positive and increasing annual NOI result indicates a well-managed facility. It’s also important to analyse expense ratios and see if there is room to reduce costs or increase income to increase profit margins.

6. Return on Investment (Capitalisation Rate)

Self storage facilities are typically valued using the Capitalisation of Net Operating Income approach. This involves applying the market capitalisation rate to the stabilised Net Operating Income. It is therefore important to investigate what return on investment (cap rate) you are receiving. Capitalisation rates are determined by analysing recent sales of similar self storage facilities, known as comparable sales. You should research recent transactions and reach out to valuers and agents who specialise in self storage to gain a strong understanding of current market capitalisation rates.

The capitalisation rate may consider the potential for expansion or redevelopment, and/or revenue upside through fee rate optimising, as this can affect the long-term value of your investment. Therefore, not only should you seek to understand the market capitalisation rate, but also the suitable capitalisation rate which should be applied to the facility.

Conclusion

A self storage investment, whether you are buying or selling, can be rewarding and lucrative. However, it pays to understand the revenue and investment metrics correctly. Speak to Four Leaves about how we can assist with Catchment (Supply and Demand) Studies, revenue metrics benchmarking, market studies, valuations, or acting as your specialised self storage selling agent.

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