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Self storage buildings are alternative real estate asset class

Date : 10/07/2017
Author:  Ahmad Hayat

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Self-storage buildings are facilities in which individual enclosed units, typically ranging in size between 50 sf to 400 sf each, are rented to private and commercial users to store items for the short-term. The concept originated in 1954 in San Antonio, TX to serve military members who needed to store their belongings. By the 1970s, the self-storage concept had gained wider commercial appeal (from a number of alternative users) and became an established business, commonly known as “mini-storage”. Today, self-storage generates US$ 32.70 billion in aggregate revenues (Source: IBISWorld), and is considered an “alternative" real estate asset class.

(A)  Fundamentals for self-storage: demand and supply factors, which influence rental and occupancy rates.
Key demand drivers: Key demand drivers for the sector have been favorable in the past 5 years, which include positive population growth, strong job creation, internal migration, rising household income, and declining living space:
• Population growth: Household formation and number of residents are the main drivers for demand of self-storage space. The trend has been favorable; the US population increased from 309.3 million in 2010 to 324.9 million in 2016, an annual growth rate of 0.86%. The trend is projected to continue at a healthy rate of 0.70% over the next 5 years. 
The Metros with population growth higher than the national average are more desirable self-storage locations. The favored cities include Dallas-Ft. Worth (1.35% CAGR), Phoenix (1.38% CAGR), Houston (1.33% CAGR), Atlanta (1.34% CAGR), and Los Angeles (1.23% CAGR).

• Employment growth: After the 2008 financial crisis, the U.S. economy added 14.97 million non-farm jobs between December 2009 and December 2016. Current non-farm total employment stands at 144.7 million, exceeding the previous peak level (in January 2008) by 6.3 million.  The current unemployment rate is 4.8% (BLS).

• Internal migration: Residential migration is a major driver of demand for self-storage space during transitional periods. The top 5 states for internal residential migration within the U.S are Washington State, California, Texas, Florida, and North Carolina.

• Rising Median Household Income: Median household income has a strong correlation with need and affordability of additional space for storage.  Since the downturn in 2008 and 2009, the U.S. median household income has increased at a CAGR of 1.35% reaching US$ 56,516.  Median household income is considered an affordability metric for residents of the area surrounding the self-storage facility (please see below).

• Smaller residential units: The average apartment size in a multifamily property declined form 1,247sf in 2014, to 1,102 sf by year-end 2015. 53% self-storage users state that the primary reason behind having items stored is lack of space, this is followed by the need of temporary storage when moving, and having unwanted or unneeded items.

Supply: The key supply metric for the self-storage market is he average stock of self-storage per capita.  The national average of self-storage space per capita is 7.7 sf (Source: Self-Storage Almanac).
According to Cushman & Wakefield, new self-storage supply is at its highest level since 2006.  New developments are generally focused on population growth centers.
It is also important to note that the market for self-storage still remains fragmented.  The largest 10 players represent 20.52% of the total self-storage square footage.
Key results: The combination of strengthening demand and increasing amounts of supply (to cater to such demand) have translated into increasing rental growth as well as higher occupancy rates.
• Climate Controlled: Average U.S climate controlled rental rates increased to $ US 1.62/sf signifying a 3.6% increase in rental rates in comparison to 2015 (Marcus & Millichap).
• Non-Climate Controlled: Average U.S non-climate controlled rental rates increased to $ US 1.29/sf signifying a 4.0% increase in rental rates in comparison to 2015 (Marcus & Millichap).
• Occupancy: The average occupancy rate for publicly listed self-storage REITs has increased since 2014.  Occupancy rates increased from 89.9% in 2014 to 91.5% in 2015 (MJ Partners).

When investing in self-storage projects, we look at the following parameters:
1. Population within a 3-mile radius should generally exceed 100,000: A densely populated area provides a strong demand base for a self-storage facility.
2. Median household income within a 3-mile radius should generally exceed US$ 50,000: Reasonably high median household incomes indicate a greater affordability and need for self-storage facilities.
3. Traffic count: A high number of vehicles passing by the property on a daily basis (e.g. 20,000 +) indicates that the property is located on a key route and is visible for future users.
4. Supply situation: We try to invest in areas where the overall supply within the sub-market is below the national average supply of 7.8 sf/person within a 3-mile radius (unless otherwise justified due to above-average demand).
5. Competing properties and their occupancy: We look into competing properties to assess rental rates while adjusting for differences in quality and specifications.  We typically target sub-markets which have high occupancy rates (e.g. 90% and above)

(B)  Capital Markets: availability of capital, which influence transaction volumes, sales prices, and cap rates.
As yields on core real estate have declined, institutional investors (pension funds, REITs, etc.) have been increasing their allocation to alternative real estate, including self-storage, in order to enhance the average yield on their real estate portfolios.  The self-storage segment became a prime beneficiary of this trend: it is becoming increasingly institutional, and prime (Class A) properties are now trading currently at cap rates below 5%.  As shown in Figure 1 below, the weighted average cap rates (Class A through C) for self-storage properties in 2016 was at 6.4%; a steep decline form 9.5% in 2000.

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Furthermore, the spread between multifamily and self-storage cap rates has decreased over the last 10 years as shown in the table below.  This reflects the increasing desirability of self-storage properties by institutional buyers, which has triggered higher transaction volumes and lower liquidity risk premiums for such assets.  The spread between self-storage and multifamily cap rates has declined from 240 bps in 2005 to 107 bps in 2016.


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In addition, during times of economic crisis (e.g. 2008 and 2009), the spread between self-storage and multifamily cap rates decreases due to the perception of self-storage being a counter-cyclical sector.

Key self-storage investors: As mentioned above, the growing pool of self-storage buyers has increased considerably over the past 10 years.  Today, buyers for self-storage include:
• Self-Storage REITs: in 2015 the transaction volume for self-storage REITS reached $US 2.8 billion. Key players in the segment include: Public Storage, Extra Space Storage, CubeSmart, Sovran, National Storage Affiliates.  In addition, there are a large number of private REITs actively participating in this segment.
• Diversified REITs: Northstar Realty Finance Corp., W.P. Carey Inc., Investor Real Estate Trust, ACRE Reality Investors, Inc.
• Pension funds: a number of pension funds have separate allocations for self-storage acquisitions.
• Regional and high net worth families.
Due to a lack of high quality properties available for sale, a larger number of investors are seeking to undertake greater amounts of leasing risk, e.g. sales completed upon receipt of certificate of occupancy.

This article is published in “Engage Q1-2017” – click to view the publication

 

Tags:  Business, Real Estate, storage

Ratings:
 Current rating: 0 (3 ratings)

Real Estate Market and New Electricity & Water Regulations

Date : 09/03/2017
Author:  Abdulrahman Al-Sanad


Since 2014 oil prices witnessed a huge fall due to many factors including geopolitical issues. This in return made all sectors to slowdown, which had impacted the consumer purchasing power to be more cautious. Real estate was one of the main sectors affected by the oil prices fall, prices of real estate properties went down as well as the demand. Government, in return, has de-subsidized diesel and gas, which raised the cost of living. Vacancies increased, especially for investment sector, in return rents decreased due to the decrease in demand and high supply.

In 2016, the value of investment, industrial and retail properties have witnessed slight decrease after a decline of 5-7% in 2015 due to the fall in oil prices, and the value of offices has remained stable with a slight increase in rental rates and sales price through 2015 and 2016.

Recently, a new bill (20/2016) was passed to increase utilities expenses for electricity and water consumption. This new law is set to be effective in May 2017 for the commercial sector, August 2017 for the investment sector, and February 2018 for the industrial sector.

The following graphs show visualizes the set increases:




In Kuwait, the non-Kuwaitis represent 70% of the population. As per Kuwait law, non-GCC nationalities cannot purchase any property leading the expatriates to the option of renting. Therefore, the investment sector is one of the dominant sectors in Kuwait’s real estate market. The new law will negatively affect this sector leading to an escalation in cost of living, which makes Kuwait less appealing to expatiates. This will lead to higher occupancy and lower rental rates. 

Regarding the commercial and industrial sectors, these increases will have a high impact as well due to the poor economy conditions effects on the purchasing powers of consumers. This will lead to huge decrease in sales that will have negative impact on current businesses and upcoming businesses affecting all sectors including real-estate. Therefore, it is also expected that the supply will surpass the demand, which leads to high number of vacancies. 

 


This article is published in "Engage Q4, 2016" - click to view the publication


 

Tags:  Business, Oil, Real Estate

Ratings:
 Current rating: 0 (3 ratings)

KSA Residential Real Estate - Transactions Review (Q3 2015)

Date : 30/11/2015
Author:  Marmore MENA

During the past decade, Saudi Arabia has witnessed rapid economic development, attributable to elevated oil production and prices, vigorous private sector activity and strong government spending on infrastructure, health, and education. The nominal GDP of KSA grew from USD 754.6bn in 2013 to USD 761.9bn in 2014, and is projected to reach USD 791.6bn in 2016. High population growth coupled with rise in per capita income has fuelled the demand for residential units in the Kingdom, especially in Riyadh and Jeddah. Government’s focus has shifted towards the housing shortage in the country, as a result of the increasing growth to the population.

Due to this, strong supply is expected from projects undertaken by the local government agencies. According to Marmore’s report on KSA Residential Real Estate, The Ministry of Housing is developing 15,000 units (handover in 2017) and 15,500 more units being planned. The Ministry of Housing is developing its first project in Riyadh, which includes 675 apartments and 2,200 land plots, which is expected to increase the supply of affordable housing, as a large proportion of the population still does not own a house in KSA. But, demand for residential real estate is expected to be relatively low due to the new mortgage policy, which has reduced the amount of loan permitted on a property. Increasing land prices, lack of construction finance and availability of land, constrain supply especially in affordable housing and middle-income housing segments. As a result a significant percentage of middle-income households choose to rent rather than purchase property. On the other hand, rising income levels and changing lifestyles has led to increase in supply of luxury high-rise residential units, with greater focus on “modern luxury”. But the combination of low interest rates and continued fiscal stimulus has raised concerns of potential asset bubbles, especially in the property markets, with the bank lending to real estate increasing by 31 per cent in 2014.

Value of construction contracts awarded in the first half of 2015 stood at USD 37bn, and despite lower oil price the contracts were awarded at a faster pace in 2015, compared to 2014. Residential real estate, roads, power and healthcare were the primary sectors accounting for close to two-thirds of the total awarded contracts, while Riyadh region captured the lion’s share of awarded contracts. Construction activity also seems to have peaked, with the demand for cement rising at double digits over the last five years.

Real Estate Transactions

In Riyadh, the total value of residential transaction appear to have experienced a YoY decline of around 32.5% in Q3 2015, and a QoQ decline of 17 per cent. A similar pattern is seen in the total number of residential deals, where a 8 per cent YoY decline was recorded for Q3 2015, alongside a QoQ decline of 10.5 per cent. Similarly, in Makkah the number of residential transactions declined YoY by 24 per cent, and QoQ by 25 per cent, whereas the value of residential transactions declined 27.4 per cent YoY and 50.3 per cent QoQ in Q3 2015.

The number of transactions continued to decline due to the new mortgage law, which limits the maximum loan amount to 70 per cent of the property value. Average price per sq m experienced quarterly decline in all three major cities; average price per sqm for land in Riyadh declined 27 per cent YoY, followed by decline of 25 per cent in Jeddah.

These declines accompany a decline in total number of transactions indicating that the sharp drop in recorded prices is not sustainable and are set to adjust after the bottleneck clears, which can only be fueled by liquidity, in the form of credit availability, and a rise in affordability. Only then will the market adjust to fair and long term sustainable values with less volatility. 

Figure: Number and value of residential real estate transactions in Riyadh from July 2010 to 2015-YTD
Fig1-Number-and-value-of-residential-real-estate-transactions-in-Riyadh.jpg
Source: Ministry of Justice, Marmore Research

Figure: Number and value of residential real estate transactions in Makkah (Jeddah) from July 2010 to 2015-YTD

Figure2-Number-and-value-of-residential-real-estate-transactions-in-Makkah.jpg
Source: Ministry of Justice, Marmore Research
 
Published by: Marmore MENA

Tags:  KSA, Real Estate, Residential, Sector

Ratings:
 Current rating: 0 (3 ratings)

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