"Shoebox" Hong Kong apartments barely provide enough living space, leave alone storage options, making self-storage facilities an increasingly attractive form of property investment. But there may be a few hurdles to consider. Oswald Chan reports.

Raymond Ng Kwok-wing paid HK$300 a month to rent an 80 square foot self-storage facility in Tsuen Wan for three years from 2011. The Hong Kong civil servant says the service was worthwhile as this helped free up more space in his home.

"When my home was being renovated, I had to remove some belongings, such as luggage bags and bulky electrical appliances like heaters, to the self-storage facility. But even after that, I found it convenient to continue to store personal effects in this facility as the price was affordable and close to my home," Ng said.

Customer demand for self-storage space is rising in Hong Kong as families are squeezed into ever-smaller living spaces where a storage area is a luxury. That has seen several self-storage service operators set up shop to capitalize on business growth opportunities.

Hongkong Storage, a self-storage services provider founded in 1997, currently manages 290 billion square feet of facilities over 15 locations across Hong Kong.

The company has successfully attracted a number of industrial building owners, ranging from individual investors and private equity funds to pension funds, to lease out their properties to it for operating self-storage business at tenancy agreements of four years or more.

The landlords themselves paid the renovation and other property-related expenses to convert these industrial buildings into self-storage facilities and install the necessary equipment, after they were approached by Hongkong Storage.

Then came management agreements with Hongkong Storage to operate their business. All Hongkong Storage branches currently operate out of such rented premises.

Hongkong Storage pays a fixed rent, representing 30 percent of its operating expenses, which also include costs of staff recruitment, advertising and provision of other value-added services to customers renting its facilities.

Based on the length of the lease and location of the self-storage facility, Hongkong Storage engages in different profit-sharing ratios with each landlord.

"Rental income from operating self-storage facilities, depending on geographical location and property management expertise levels, is generally 20 percent to 40 percent more than rental income from traditional industrial activities," Hongkong Storage Managing Director Louis Chung Lap-ching told China Daily.

Besides higher rental income, there are other reasons why some industrial property owners like to rent out their properties as self-storage facilities.

"Some industrial properties, being controlled sometimes by family trust funds, cannot convert the industrial buildings to put them to other commercial uses due to the investment restrictions laid down by these family trust deeds. Rental income generated by self-storage facility is still permitted under these deeds," Chung explained.

Signs signal boom

The demand-supply dynamics of the self-storage market in Hong Kong essentially favors the industry amid strong demand and limited supply.

Demand for self-storage space from local residents is expected to rise as the government's well-publicized efforts to increase home supply will have a positive impact on the sector.

This is because most apartments sold in Hong Kong have no dedicated storerooms.

According to estimates by global commercial property specialists Colliers International, about 852,000 private residential units in Hong Kong lack dedicated store space. This translates into self-storage facility demand of around 6.15 million square feet to 12.3 million square feet.

With current supply at just around 2.8 million square feet, the signs point to a marked undersupply in the sector.

More domestic users are shifting from mainly putting bulky and/or infrequently accessed items in storage, to becoming comfortable with putting items like valuables, sports gear, wine and seasonal clothing into such facilities.

Customers are also attracted by other value-added services such as a climate-monitored environment, moving assistance services and online orders.

Besides domestic users, demand for self-storage space is also increasing among corporates. Given the high office rents, it is unlikely business operators will increase storage space in situ, making self-storage an increasingly viable solution for companies.

"Retail and e-commerce industry players also demand self-storage facilities as they need space to manage their inventories more effectively," Darren Benson, executive director for Industrial and Logistics Services at CBRE Asia, told China Daily.

But room for expansion in the self-storage sector is limited. "The current vacancy rate of industrial buildings remains low, meaning less room for more industrial spaces to be converted into self-storage facilities," Wayai Chiu Wai-hung, senior director of Industrial Services at Colliers International, told China Daily.

"The government's revitalization policy, which encourages industrial buildings to be converted to office and retail uses, limits the supply for self-storage facilities in the city," CBRE's Benson added.

According to CBRE figures noted by Benson, rental income from operating self-storage facilities can be as high as HK$27 per square foot, compared with HK$9 per square foot for conventional industrial uses.

The key components for investment success in self-storage space are location accessibility, space security, long tenure and economies of scale. Other attributes of self-storage facilities, such as number of car parks, signage, electricity supply and reliable lift services, can also determine the rent level that self-storage companies can charge customers.

The first two factors are self-evident, as facilities with good transportation network and security arrangements are vital to attract and retain clients.

The third criterion - a long-term tenure - is essential because frequent relocation would damage the self-storage business. Clients may stop buying self-storage services if they have to access space in different locations.

Moreover, a long lease can enable self-storage investors to amortize the huge investment outlays involved in running industrial buildings as self-storage facilities.

Colliers International estimates that a nine-year lease for operating self-storage facilities can bring an internal rate of return of more than 30 percent, assuming a stable occupancy rate of 90 percent that results in a payback period of 4.5 years.

The last criterion - economies of scale - is also important. Regardless of the size of the self-storage facilities, staff requirements for operating such sites are virtually identical. Hence it makes good business sense to operate larger self-storage spaces to maximize benefits from economies of scale.

"After the payback period, self-storage companies can basically earn a constant flow of rental incomes," Colliers International's Chiu said in explaining how lucrative the industry is. Amid such attractive business prospects, Hongkong Storage is considering expanding to mainland cities like Beijing, Guangzhou, Shanghai and Shenzhen, and even the overseas markets of Japan, Singapore and Taiwan.

"Given our business model, coupled with our localized knowledge in different markets through our strategic partners, we aspire to be Asia's largest self-storage facility provider," Chung said. "We may even aim at a listing in the future to elevate our corporate governance standards."

Likely pitfalls

However, though it is a lucrative business on the whole, the industry involves numerous investment and business risks, with profitability impacted by the local economic environment, interest rate cycle and government policy.

"Hong Kong's economic performance is the greatest risk for self-storage operators," Colliers' Chu said.

"In a poor economic environment, people earn less disposable incomes, and they buy less of items such as wine, personal clothing and other consumer collectibles.

"This will certainly curb discretionary spending in self-storage services."

"Obtaining a long lease of three to five years is not easy for self-storage operators because industrial building landlords usually agree to a shorter lease of one or two years so that they can raise the rent after it expires," Chiu noted.

An US interest hike is imminent this year and will therefore come during the hold period for the self-storage sector. Interest rate fluctuations will definitely make rental prices of industrial buildings more volatile.

Policy risks also should not be ignored. Under the policy of revitalizing industrial buildings, eligible owners may be tempted to convert their premises into office, retail or hotel spaces, and landlords may be tempted to terminate the leases of self-storage operators.

Contact the writer at oswald@chinadailyhk.com

Posing with guest speakers Diamond Shea (far left), chairman of community organization Hong Kong Owners Club, and Self Storage Association Asia Executive Director Luigi La Tona (far right) are Louis Chung Lap-ching (second left) and Bobby Chung, managing director and chairman, respectively, of event organizers Hongkong Storage at a seminar held on March 30 to showcase the self-storage industry and related investment.  Photo Provided to China Daily

(HK Edition 04/24/2015 page9)