Victor Mupunga | Research Analyst | Private Client Securities | Old Mutual Wealth | mail me |
Urban logistics as a subsector has benefited from the surge in online shopping and the demand for ever-shorter delivery times. While the pandemic has driven sustained and unprecedented disruption of property as an asset class, self-storage has emerged as a resilient sub-sector.
In a market where traditional property sectors are facing multiple headwinds, the self-storage industry’s growing appeal makes it an opportunity worth exploring.
Similar to logistics and data centres, this sub-sector was one of the few global segments within the property industry that benefited from the COVID-19 related lockdowns.
Rising demand in self-storage
Businesses, primarily SMEs and e-commerce operators, have opted for self-storage to house their inventory in response to spikes in online orders, which have been accelerated by COVID-19.
Residential demand, on the other hand, has been driven by rapid changes in circumstances brought about by the pandemic as many households consolidate to cut costs, as well as tackle other life disruptions, such as divorce, death or downsizing.
While there have been unprecedented disruptions created by ‘stay at home orders’ on offices, retail properties and shopping malls sector-wide, the self-storage subsector holds exciting opportunities for investors focusing on individual companies.
A bottom-up approach assumes individual companies or sub-sectors can do well even in an industry that is not performing, at least on a relative basis. One of these opportunities locally is Stor-age, the only self-storage Real Estate Investment Trust (REIT) in South Africa, and only one of nine in the world.
Attractive fundamentals
Stor-age is well-positioned as the market leader in South Africa, and its UK business is among the top ten in that market. The self-storage industry has attractive fundamentals while still being fragmented, favouring the most prominent players.
One of the attractive fundamentals of the industry is the highly effective operating efficiencies, with about 80% of the costs fixed. A factor that has proven the subsector to be recession-resilient, making it evident why Stor-age has outperformed the broader JSE property index since listing in 2015.
Of particular interest to investors is the UK exposure, with about 62% of its portfolio being South African-based and the rest being in the UK. The two businesses can learn and leverage experience – with the UK arm’s digital strategy of direct benefit for South Africa.
The UK’s greater reliance on technology spurs the company to refine its digital capabilities to grow revenue while enhancing management of independent third party assets, which can be extended to the SA business.
Looking ahead, we believe that there are still multiple tailwinds for the business. Across both the UK and South Africa, the self-storage industry penetration remains comparatively low with awareness and demand increasing.
The group’s strategy to grow its management and digital platforms will increase scale, drive demand and entrench its leading market position. This informs our view that there is more in store for investors seeking income growth in addition to the current 7.5% dividend yield.
Ultimately, investment strategies need to look beyond the immediacy of headwinds and industries at large. Instead, taking a bottom-up approach and singling out attractive companies is a better strategy for delivering returns in uncertain times.