Locking in income

Investors plan to increase their allocations to the self-storage sector, but lenders see the European market as fragmented, finds Lauren Parr

Regardless of the political and economic factors at play across Europe, people continue to move house, get married, and have babies. These events prompt efforts to de-clutter homes and the self-storage property sector is a beneficiary.

The European market remains fragmented and small-scale compared with the US, where self-storage units are a feature of the landscape. However, there is growing investor demand. JLL recorded €500 million of European transactions in the 12 months to October 2016, up 25 percent on the previous 12 months. In a survey by the firm, a sample of investors were asked which alternative sector they would consider increasing allocations to in the coming 12 months; the largest proportion, 34 percent, said self-storage.

“Strong user demand and increasing urbanisation are key factors driving the boom in the self-storage market and opening up opportunities for old and new investors alike,” says Ollie Saunders, head of self-storage at JLL.

Last year’s stand-out UK deal was the largest ever self-storage portfolio acquisition in the country. US operator StorageMart acquired 15 Big Box stores for £112 million, financed by Blackstone Real Estate Debt Strategies. The £83 million five-year whole loan was written through the Blackstone Mortgage REIT.

“For us, bridging the gap between corporate and real estate is an interesting space. We are finding inefficiencies within debt capital markets for certain operational assets – self storage is one of them,” says Michael Zerda, head of Europe at BREDS.

“’We think you are less exposed to economic factors that impact most real estate transactions. Life events drive self-storage which means it’s likely to be impacted on a lesser basis than other uses.

“We liked the sponsor – one of the largest self-storage operators in the US – which is backed by significant capital and has extensive experience in the sector. The UK market is much less advanced than North America and there is a lot of potential for improved yield management and consolidation.”

JLL’s Saunders observed strong interest in the portfolio from “a variety of investors” that were attracted to the sector’s predictable cashflow and rapidly increasing consumer awareness.

In another recent deal, in January, Royal Bank of Scotland provided a two-year extension to a £40 million revolving credit facility which it provided to Lok’nStore at a competitive margin of 1.40-1.65 percent over Libor.

Other lenders’ interest in the sector is driven by recognition of self storage as “an accepted service in the market place in which there are a number of well-established operators with a trading history”, according to one debt fund manager.

“It has gone from being completely alternative to a manageable sector where you can rely on data from past performance,” he says.

JLL predicts that this year will see strong M&A activity with over £250 million of transactions helping to build portfolios of scale and an increase in the number of specialist investors looking to gain a foothold in the UK market. Listed UK self-storage companies represent 21 percent of the entire European sector, with Safestore, Big Yellow and Lok’nStore continuing to expand in what Saunders calls a “fragmented market”.

The UK houses almost three times the number of facilities as France. The German market has come along but it remains small, reflects JLL’s Markus Kreuter, head of debt advisory in Frankfurt. “The operational risk is even higher than student housing which means you’re simply relying on the success of the operator, so it’s tough to find finance,” he says.

Overall, the opportunity for lenders remains somewhat limited. The Big Box deal was the first for BREDS in the sector, explains Zerda: “It’s a granular marketplace and difficult to find private operators that are acquiring in scale.”

Some lenders remain wary of the sector. Andrew Macland, head of UK for PGIM Real Estate, sees little opportunity in London as “it’s a disparate market”. He describes a situation in which assets need to be in or close to London “where land values are high”, yet cheaper assets are often poorly situated. “You don’t need to be too far away to get it wrong,” he says. 

Data centres do not compute for all lenders

The growth of cloud computing has been the driving force behind Europe’s data centre market in recent years. EMEA investment volumes reached £400 million in 2016 compared with £180 million in 2015, and JLL expects a 20 percent rise in the UK this year.

Take-up levels last year were unprecedented, at 155 megawatts, measured by power density per square metre, across the four major European data centre markets of Frankfurt, London, Amsterdam and Paris, according to CBRE research.

“Data centres are incredibly interesting at the moment,” says PGIM Real Estate’s Andrew Macland. “There is a lot of scale because you’ve got some very big players looking to grow that don’t want to give up market share. They need sites but it’s not easy to get the right location owing to planning and infrastructure.”

One of the market’s largest investors, AXA Investment Managers — Real Assets, with a portfolio of more than €200 million, acquired a newly developed data centre near Amsterdam’s Schiphol airport for €36.4 million last November. The 16,330 square metre facility is fully let on a long-term lease to an international operator.

A sponsor’s track record is particularly important from a lending perspective because the asset class is not necessarily viewed as real estate risk, but operational risk with a real estate shell. As such, it can be difficult for lenders to determine assets’ end value and exit risk.

“The problem is these sheds are so big and the cost of high fit-out is great, yet the possibility of alternative use is very low,” says Macland.

A space to park your capital

Car parks can attract significant financing activity. Last December, GIC and Starwood financed Davidson Kempner’s £500 million acquisition of 88 NCP car parks with a £275 million joint senior loan. The portfolio included profitable car parks at Heathrow and Birmingham airports, and numerous other sites with the potential to be redeveloped into residential or office schemes.

“Car parks represent a pretty reasonable risk from a lender’s point of view because they offer upside in redeveloping the land typically, which means cashflows and the loan amount is underpinned by an attractive option concerning land value if a sponsor can get planning consent,” says a debt fund manager.

Another alternative sector “set to attract interest from a range of lenders this year” is holiday parks, which are benefiting from the growing staycation trend, according to Lisa Attenborough, a director in CBRE’s specialist markets team.

Bank of America Merrill Lynch, Barclays, JPMorgan, RBC and SMBC are understood to have underwritten a £600 million senior leveraged loan for Canadian private equity firm Onex’s buyout of British holiday park operator Parkdean Resorts at the end of last year. Ares provided a £150 million second lien loan.

Ares also backed the acquisition of Park Leisure by a consortium of investors led by Midlothian Capital, in partnership with one of the business’s co-founders, for a value of £103 million in February.