Extra space for growth
Property investors are turning to alternative real estate sectors that are less exposed to economic swings
The only Sa-focused property stocks — besides perennial outperformers Fortress Income Fund and Resilient Reit — that count among the sector’s top 10 in terms of share price growth over 12 months are self-storage operator Stor-age Property Reit and logistics play Equites Property Fund. The two counters are up 18% and 39% in the year to September 29. That compares with a 6% rise in the SA listed property index as a whole over the same period.
Analysts say demand for specialist offerings such as Stor-age and Equites is indicative of growing appetite for stocks that invest in nontraditional real estate sectors.
“Recent results reported by the listed property sector show that the earnings quality of companies exposed to the retail, office and industrial sectors has deteriorated quite quickly on the back of a weak economy,” says Sesfikile Capital portfolio manager and director Kundayi Munzara. He says it is becoming increasingly difficult for diversified funds just to maintain
inflation-beating dividend growth. In contrast, niche offerings such as Stor-age and Equites are still delivering sector-leading growth.
Munzara says that, as a result, management teams are increasingly looking at alternative asset classes that are less cyclical or vulnerable to economic ups and downs. He believes selfstorage, student housing, infrastructure (including cellphone towers and power plants) and health-care-focused property funds will gain further traction over the next two to three years as the SA economy slows.
“Globally, investors have paid a premium for specialisation in companies and shown higher demand for property stocks that operate in these new real estate sectors as they tend to be more defensive in a downturn than their mature, more traditional counterparts,” says Munzara.
Self-storage is a particularly interesting sec- tor given that it is still in its infancy in SA. Wynand Smit, research analyst at Anchor Stockbrokers, says there is no doubt that self-storage is increasingly on the radars of SA investors as the dynamics are attractive, especially relative to more established property sectors.
Some of the demand drivers for self-storage, such as life events (marriage, divorce, death, birth) and relocations, are not linked to the performance of the economy. In fact, Smit notes that some demand drivers are countercyclical and can lead to increased demand in a downturn. For instance, more people may be forced to rent or scale down to a smaller property in a recession, creating additional demand for shortterm storage of furniture and other possessions.
Smit says the self-storage industry in SA is fairly fragmented, which creates scope for consolidation among established players with strong operational platforms. “However, the sector will need to gain scale in order to offer institutional investors adequate liquidity.”
The only pure self-storage play currently available to JSE investors is Stor-age.
However, SA Corporate Real Estate recently entered the sector through a R65.6m investment in Storage Genie, while rand hedge counter Schroder European Reit offers investors exposure to the UK self-storage market.
Stor-age was founded 12 years ago by Cape Town-based chartered accountants Gavin Lucas and Steven Horton and listed on the JSE in November 2015. The company is the largest self-storage operator in SA. Its local portfolio spans 300,000 m² across 31 properties worth R2.1bn.
Last month, management announced its first offshore acquisition, a 97.3% stake in Uk-based Storage King for £77.13m. Storage King operates 25 facilities across England and is the sixthlargest self-storage brand in the UK in terms of number of stores.
Lucas says they initially thought it would take three to five years to educate the SA market on the investment case for self-storage. However, it has taken less than two years for Stor-age to get the backing of a wide range of institutional investors.
“The big boys have bought into the story sooner than we anticipated, which I suspect has to do with how well the self-storage sector has performed in the UK and US.
“We have also delivered on our prelisting promises,” says Lucas.
The big boys have bought into the [StorAge] story sooner than we anticipated, which I suspect has to do with how well the self-storage sector has performed in the UK and US. We have also delivered on our prelisting promises Gavin Lucas
He believes the biggest misconception about the sector is the perceived risk of having shortterm tenants, similar to those of hotels, which some analysts equate with an inconsistent level of earnings. “But in reality that risk doesn’t exist.”
Lucas says that while leases are structured on a month-to-month basis, the average length of stay in the Stor-age portfolio is 14 months. The fact that the company has nearly 20,000 individual tenants also mitigates risk, as it is not exposed to a potential large vacancy when one or two tenants leave, as is often the case in the office market.
Lucas says initial concerns that growth opportunities in the SA self-storage market were limited also proved unfounded.
“We have nearly doubled our portfolio from around R1.2bn to R2.1bn in less than two years since listing. In addition, we have a development pipeline worth R1bn that will be brought onstream over the next three years. And if one also considers our recent UK acquisition and development opportunities in that market, our growth story is very much intact.”
Despite the recent run in its share price, Stor-age is still trading at a relatively attractive forward yield of 8.2%, ahead of the 7.6% sector average.