Navigating challenges and seizing opportunities in Hong Kong’s self-storage sectorBy Hannah Jeong
Hong Kong’s self-storage business evolved in four distinct stages. It first emerged in the mid-1990s when the concept was introduced from the US. The second stage saw rapid expansion, driven by rising demand due to the decreasing size of Hong Kong homes.
Local players like SC Storage capitalised on this demand, taking advantage of the significant rental gap between old industrial premises and self-storage facilities. However, the industry faced a turning point when a deadly fire occurred at an SC Storage facility in Ngau Tau Kok in 2016 that started in a self-storage unit.
The blaze resulted in more stringent regulations and safety requirements for self-storage operators. The industry underwent a period of restructuring and consolidation as operators adapted to the new regulatory environment.
The fourth stage of the sector’s development coincided with the COVID-19 pandemic. Despite the challenging circumstances, the market experienced rapid expansion with increased merger and acquisition activity. Institutional investors like Blackstone, Brookfield, and Warburg Pincus recognised the market’s potential and actively supported its growth.
Prominent players in the sector include Storefriendly, SC Storage, Apple Storage, and StorHub. Notably, Storefriendly and StorHub are multinational companies offering full-service facilities, including typical mini-storage, wine cellars, supplementary sales counters, and a pantry area with complimentary drinks. They differentiate themselves from smaller competitors by providing industry-leading customer service and incorporating human-centric design elements into their facilities.
Financial implications and opportunities
Investing in self-storage compared to traditional industrial premises presents significant financial differences. Whilst there is a substantial rental gap between old industrial premises and self-storage facilities, operating costs and the level of management expertise required vary.
To examine the differences, a multi-scenario analysis has been conducted to compare the profitability of investing in traditional industrial units versus self-storage
Assuming an industrial unit with a GFA of 15,000 sq. ft. is acquired at HK$4,000 psf, and let at HK$12.3 per sq. ft. based on GFA and the prevailing market rent, it could generate a Net Operating Income (NOI) yield on cost of 3.4%.
On the other hand, if an investor needed an additional HK$450 psf in Capex to convert the premises into self-storage space, the venture would need 60% occupancy to generate superior returns compared to typical industrial investments because of the fixed overhead costs – management expenses, sales, and marketing – the lower NOI margins and space efficiency associated with self-storage.
However, there are significant opportunities for investors. In mature markets like the US, self-storage facilities enjoy stabilised occupancy of 90%. If HK self-storage space achieves a similar occupancy level, it could see an 80% increase in NOI and a NOI yield on cost of more than 5%, which is unparalleled to most Hong Kong asset classes.
The scenario above illustrates the possibilities of a single floor; operational efficiency would improve with a larger floorplate or en-bloc property, whilst the leasing risks will increase proportionally. However, this example also serves as a simple indication of increased profitability as the market matures.
Furthermore, Hong Kong’s market size suggests that there is still untapped demand compared to other mature markets, presenting opportunities for further growth. Additionally, there may be a potential for repricing in terms of cap rate expectations as the market develops, attracting investors with the prospect of significant yield spreads compared to traditional industrial premises.
Operational, legal, and liquidity risks
Despite the potential and positive outlook, investing in self-storage is not without its challenges. Operational risks are significant. The shorter-term tenures result in greater income volatility compared to longer-term leases.
The industry is also highly fragmented, leading to fierce competition among operators. Providing extensive customer services, such as assistance with moving and storage logistics, is essential to attract and retain customers, but it adds operating costs.
Legal risks are also a challenge. Investors and Operators must heed the relevant Land Control, DMC, planning restrictions and building and fire safety regulations.
In terms of land grant restriction, If a Government Grant stipulates “industrial and / or godown use” or solely “godown use”, using the space for mini-storage does not breach the terms of the grant. However, self-storage is not permitted if the government grant only allows for” “industrial use”, “workshops,” or “factories”, as these uses typically refer to manufacturing rather than storage.
To avoid the Lands Department taking lease-enforcement action – such as registering encumbrances against the property’s title or even re-entry – owners can apply for a short-term waiver or a lease modification upon payment of the land premium. We suggest that investors perform thorough due diligence and engage a professional surveyor to make informed investment decisions.
Liquidity risks exist, particularly in smaller-scale operations. The lack of well-established management companies limits investors’ ability to outsource management roles whilst receiving stable returns, restricts small-to-medium-scale investors’ market entry and reduces asset liquidity.
Promise for forward-thinking investors
Given the significant fixed overheads and space efficiency shortcomings compared to traditional industrial investment, operators have rolled out initiatives and the latest technology to lower admin and staff costs. For example, Storefriendly has introduced Storefriendlygo – the first robot technology for self-storage in Hong Kong – which enables better space optimisation and increases space efficiency by reducing corridor space to effectively maximise the number of storage units within a given area.
Hong Kong’s self-storage market is expected to continue its period of consolidation for the next few quarters. Operators and investors will focus on cost-effectiveness, deploying technology to enhance efficiency, pursuing vertical integration with related businesses such as moving companies, and offering incentives to maintain competitive rent levels.
In the long run, the sector will likely experience sustained demand. The dense population, dwindling living space and changing lifestyles will drive the need for transitional storage solutions. The ongoing demand for self-storage services during moving and migration will support this organic growth.
The market has the potential for repricing opportunity, as Hong Kong investors expect a significant yield spread between self-storage and traditional industrial premises.
US investors perceive self-storage as a negative yield spread compared to the general industrial / logistics market, so more capital appreciation is expected to unfold as the market matures when cap rate expectations lower.
Whilst investing in self-storage in Hong Kong comes with challenges, the market’s solid fundamentals and growth potential make it an attractive long-term opportunity for investors.