As the Australasian self storage market matures and attracts greater institutional capital, one of the most likely trends that will continue to emerge is the capitalisation rate spread between primary and secondary assets.
It’s important to understand this spread as it has a direct impact on value, opportunities to acquire, and future exit strategies.
What is a Capitalisation Rate?
A capitalisation rate (or cap rate) represents the return an investor receives based on a property’s net operating income relative to its purchase price. Fundamentally, an asset’s cap rate reflects the risk associated with it.
In simple terms:
Lower cap rate = higher value
Higher cap rate = lower value
A facility generating $1 million in net operating income valued at a 5.0% cap rate would be worth $20 million. The same income stream valued at a 7.0% cap rate would be worth approximately $14.3 million.
Small changes in cap rates can therefore have a significant impact on asset values.
Types of Cap Rates
There are two capitalisation rates commonly referenced in the self storage market: the initial capitalisation rate and the equivalent capitalisation rate.
The initial capitalisation rate represents the return on investment based on the facility’s current (or passing) net operating income. An underperforming asset will often exhibit a relatively low initial cap rate.
The equivalent capitalisation rate reflects the return an investor expects to achieve once the facility is operating at market levels. For underperforming assets, a ‘below-the-line’ adjustment is made to account for the income shortfall during the period required for the facility to stabilise. Valuers apply these adjustments when analysing transactions to enable meaningful comparisons between assets on a like-for-like basis.
A simple example is a facility that is 70% occupied in a market where stabilised occupancy is typically 90%. While the initial cap rate may appear low based on current income, the equivalent cap rate provides a more accurate reflection of the asset’s underlying value once it reaches stabilisation or ‘maturity’’.
Defining Primary and Secondary Assets
Within self storage, primary assets generally exhibit the following characteristics:
- Strong metropolitan location, ideally with main road exposure
- High barriers to entry (to limit increasing competition)
- Modern design and construction. Good access and docking are important
- Strong occupancy and revenue performance
- Institutional-grade management
- Meaningful scale (6,000 to 8,000 square metres of Net Storage Area is the sweet spot).
Secondary assets may include:
- Regional or tertiary market locations, often with back street locations.
- Smaller facilities lacking scale
- Older style improvements
- Limited expansion potential
- Lower revenue management sophistication
- Greater reliance on local market conditions
While both asset classes can perform well operationally, investors typically perceive the assets as having different levels of risk and desirability.
Why the Spread is Increasing
Historically, the difference between prime and secondary self storage cap rates was relatively modest. However, several factors are contributing to a widening gap.
- Institutional Capital is Increasingly Targeting Scale
Large investors and funds are focused on assets capable of deploying significant capital efficiently, with higher profit margins. This naturally directs demand toward larger metropolitan facilities and portfolios. These assets are often within areas that have higher barries to entry; they are more likely to have top-tier management, and they will typically be performing at the upper end of the market.
Strong competition for these assets has compressed cap rates and driven values higher.
2. Risk is Being Priced More Aggressively
With the recent environment of higher interest rates and increased economic uncertainty, investors are becoming more selective.
Facilities with weaker growth prospects, limited market depth, or operational challenges attract lower institutional interest and are more likely to appeal to second-tier investors. This brings a variance in pricing which typically results in a higher rate of return/ resultant cap rate.
3. Secondary Investors are More Sensitive to Interest Rate Rises
The investor profiles targeting primary and secondary assets can be quite different.
A-Grade self storage facilities are typically acquired by institutional investors, REIT’s, and large private equity-backed funds that typically have access to lower-cost capital and longer investment horizons. These buyers are often prepared to look through short-term fluctuations in interest rates when they have confidence in the underlying asset quality and long-term growth prospects. They are also more likely to have access to cheaper financing and funding options.
Conversely, secondary assets are more commonly purchased by private investors, syndicates, and smaller operators who are generally more reliant on debt funding. As interest rates rise, borrowing costs increase and debt serviceability becomes more challenging, directly impacting acquisition capacity and pricing.
As a result, secondary asset values tend to experience greater downward pressure during periods of elevated interest rates, while prime assets often demonstrate greater resilience. This dynamic can widen the capitalisation rate spread between primary and secondary facilities.
In simple terms, when money becomes more expensive, investors become increasingly selective. The best assets continue to attract capital, while secondary assets must offer a higher return to compensate for the additional risk and financing constraints. We are already seeing this in the Australian market since the RBA started raising rates in February 2026.
4. Revenue Growth Expectations Differ
Primary facilities often benefit from being within stronger customer catchments with larger populations, higher population growth, greater residential density, and stronger customer demand.
Investors can be willing to accept lower initial yields where the fundamentals are strong. Typically, primary facilities in major markets will attract stronger confidence surrounding stable growth.
To the contrary, an investor may see stronger growth in a secondary market which has yet to be institutionalised. They are attracted to the initial strong return which can be enhanced quicky through a more commercial-style management to quickly increase performance. This can be particularly beneficial for value-add plays which can show strong short-term increases on cost (yield on cost) – an important metric for investors.
What Does This Mean for Our Market?
For owners of premium assets, the current market remains supportive of strong valuations and sale prices. Quality continues to attract strong interest.
For secondary asset owners, the story is more nuanced. Facilities that can demonstrate operational upside, expansion potential or improved revenue management may still attract strong investor interest.
In many cases, the difference between a primary and secondary assets is no longer just location. Increasingly, it is the quality of the income stream, management sophistication, and the perceived sustainability of future growth.
As larger investors seek scale, quality and certainty of income, we expect the cap rate spread between primary and secondary assets to remain a defining feature of the market.
For investors, prime assets continue to command premium pricing, while secondary assets may offer attractive risk-adjusted returns where operational improvements can unlock value.
Perhaps the greatest indicator of an institutionalising market is not that cap rates move, but that they move differently at various times in the market. The widening spread between primary and secondary self storage assets reflects a market where capital is becoming increasingly selective about where it is deployed.
