Putting money into storage

PORTFOLIO POINT: Strata titled storage is a relatively cheap property option, but would-be investors should do their homework.
Strata titled storage unit investment is an under-reported yet highly visible section of the property industry. Though it is widely advertised as an investment option, investors have to struggle with a lack of public data, a lack of regulation and a lack of transparency in the companies.

However, as an investment option strata titled storage units continue to attract investors for one outstanding reason: they are relatively cheap; that is, they cost considerably less than any other form of property. A typical unit investment can be as little as $20,000 or as much as $200,000. Moreover, they can be purchased by DIY superannuation funds.

Investors are also attracted to the prevailing “guarantees” offered by most of the companies such as Equity Strata Storage, Strata Store and U-Own Storage. Typically, storage companies that supply the units guarantee a return of up to 8% a month for set period, usually between one and three years.

This sort of investment is attractive to investors who want to start small or those who think it is less work than traditional property investing. Investors in storage (or any form of “guaranteed” property) should bear in mind that guarantees are only as good as the companies that provide them. As property correspondent Monique Wakelin put it recently: "Off-the-plan units are often marketed with rental guarantees and other tax incentives and concessions. Prime investment property does not need sweeteners!"

Ian MacGowan, industry analyst at research house IBISWorld.com.au says: "The broader warehousing sector is tracking quite well. The latest forecasts indicate growth throughout 2009 and into 2010.”

However, despite a positive outlook for the sector, is strata storage a feasible long-term option? The issue for investors is that because strata storage is relatively cheap to create and that means the problem of over-supply is never far away.

Strata storage differs from traditional property investment in a few important ways. The resale of the property is not as assured as it is with a house.

Mark Armstrong, director of Property Planning Australia, says: “This kind of industry is one that can go from under-supply to over-supply very quickly. You can start with very few of these investment places and because they’re so easy to manufacture, you can be overrun with them in no time.”

Defending the industry, Tony Mullins of Strata Store Group, which specialises in storage, sees strata storage investment as a good market for first-time and super fund investors. “There’s been a 30% growth in the past eight years and we’re expecting high growth in the next decade as well.”

Investors seem to be responding. Mullins says that about 70% of Strata Store Group’s sales so far, have been to investors and 30% to owner-occupiers or those who are using the facilities themselves.

A typical Strata Store Group transaction might run like this: After you buy a unit for between $63,000 and $114,000, the company guarantees a return of 8% of the net worth of the unit for between two and three years, the time it says it will take to get to full occupancy. You also have to allow about $1100 a year for fees, which include maintenance, water and related services. Mullins assures these are standard fees across the industry.

For investors who prefer traditional property investment an additional concern with strata storage is the bulk of sales are done on off the plan. What's more, the storage company also acts as a real estate agent finding tenants for you.

If that concept seems promising, it does not always work out. It was reported in September 2008 that about 300 strata titled storage unit investors were owed $500,000 after their building manager, Bar Um Pty Ltd, failed to pay five months rent. The company made losses in both 2006 and 2007.

Armstrong suggests investing in storage unit trusts, where your investment covers up to 100 storage units, is a better way to invest. “This is less risky when it comes to finding tenants and reselling the unit. This is a way of diversifying your investment while still being involved in the warehousing boom.” Unfortunately this sort of investment is not as widely available as the purchase of a single unit.

An additional concern for investors is the lack of public information on strata storage. It is difficult to even find an exact number of operating companies in Australia.

Armstrong urges would-be investors to look closely at any lease agreement offered by a strata storage operator. “How strong the lease is can determine how the investment will go,” he says. "A lot of these places guarantee a percentage return for the first 12 months; this sounds great and a lot of people get sucked in, but people need to see these as long-term investments. What happens after 12 months? There should be detail in the lease about what kind of returns you will get per year.”

Armstrong regards “guarantees” as warning signals. “To me, it shows a fault in valuing the yield. If after the guarantee time the yield drops from 8% to 6% then that indicates a 25% drop in your property’s value because the value is directly related to the yield.”

To get a true value of the yield, perhaps buying an existing unit, rather than new, could mean the company’s history could be explored. Second-hand markets are at the discretion of the company, and are also much more difficult to find than off-the-plan purchase.

As with any property investment, strata storage requires research. Picking the right company based on location, lease agreements, history and long-term prospects are crucially important.

It would be unwise to assume that because strata storage is a cheap investment option it is also easy. This is indeed a growing industry, but given that the vendor is also the operator means investors must have confidence in the company they are dealing with. They should choose carefully, do extensive research and fully understand any contract they sign.