Asia’s Small Homes, Decluttering Drive Self-Storage Investments

(Bloomberg) -- Expensive rents for small homes, increasing affluence and work-from-home practices in Asia have fueled demand for self-storage and piqued investor interest in the nascent sector, attracting capital from global private equity firms to pension funds.

These urbanization mega trends are giving institutional investors hope that Asia can achieve the success seen in established markets, such as the US self-storage sector that had grown to a whopping $29 billion.

“Operators and investors started to have a really strong belief that Asia will follow a track that's probably very similar to, not the US market today, but the US market maybe 15 to 20 years ago, when they first started to develop,” Li Fan, managing director of global private equity firm Warburg Pincus and board director of StorHub, said in an interview.

The rising popularity of self-storage in Asia comes as investors increasingly turn to alternative real estate due to macroeconomic concerns and property downturns in some cities. Returns from self-storage businesses can be meaningfully higher than other real estate investments as it is counter-cyclical, resilient to inflation and incurs fixed costs, experts interviewed said.

‘Strong Conviction'

Warburg Pincus started to have “very strong conviction” in Asia's self-storage sector about five years ago, Fan said. Then, when the pandemic hit, industry interest accelerated as investors assessed the ‘five Ds' driving the market - density, disposable income, divorce, death and after Covid — decluttering. 

Warburg Pincus, through its unit StorHub, bought Storage Plus Corp. for an undisclosed amount last month. It was one of the country's largest self-storage acquisitions recorded, the firm said. The company continues to look for similar deals, said Fan.

The self-storage market in the region is fragmented and competitive in some areas, said Graeme Torre, head of Asia-Pacific real estate at APG Asset Management N.V., which has invested in the sector.

“We take comfort that self-storage demand is resilient, and customers are generally price insensitive, as such competition from a new operator is unlikely to bring significant challenges to our investments,” Torre said. 

The Amsterdam-headquartered pension investor bought the self-storage provider Extra Space Asia last October in a joint venture, with APG taking a 90% stake and CapitaLand Investment Ltd 10%. They committed an initial equity investment of S$570 million ($417 million) with an option to increase the figure up to S$1.14 billion. 

The company continues to review buying opportunities in the six markets that Extra Space is currently in, and is considering expansion into new Asia-Pacific markets including China and Australia through portfolio acquisitions or mergers, said Torre. 

Deals involving operational self-storage assets alone, excluding industrial assets acquired for conversion, were worth $797 million last year, up from $445 million in 2019, according to MSCI.

While the sector is still in its early stages, investing in it is not always easy. Companies must have the flexibility to scale as each facility is small. Providers also have to meet changing regulations such as the need for higher fire-safety standards, and offer a range of products such as wine storage or drive-up storage. High real estate prices and a limited availability of suitable space in cities are also challenges. 

Still, transaction volumes will continue to rise and the market will “grow considerably” over the next three to five years on structural demand from individuals and businesses, said Martijn van Eldik, Jones Lang LaSalle's Asia-Pacific head of corporate finance.

Within Asia, the industry is more developed in Hong Kong, Singapore and Japan. Mainland China is catching up, while the sector is still in an early-development stage in Southeast Asia, providing scope for growth as standards of living rise in the region's emerging economies, he said.

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