The Global Financial Crisis led to a dearth of transaction evidence in the traditional real estate market which has become less acute in recent times, changing for the better generally since late 2011. As the number and consistency of property transactions increases through 2015 and beyond, and despite the current uncertain economic and political climate and sentiment in this country, and several States in particular, the situation for traditional property investments is an improving one.
The low interest rate environment is likely to continue for some time. In the traditional market, demand is generally focused upon prime retail, commercial and industrial areas as well as “quality” building stock and its proven property fundamentals based upon cashflows and tenants.
In the self storage industry, which has continuing reference to traditional market activity, analysis of publicly available information on most recent individual freehold property sales that have occurred since 2014 indicate that net yields / capitalisation rates (“cap rates” – PS: You may also be interested in my other blog, titled Cap Rates 101) on mature, going concern cashflows have generally sharpened, leading to higher going concern values.
Cap rates for going concern self storage properties generally always remain above those achieved in more traditional forms of premium-quality commercial and industrial “blue chip” real estate investments, directly because of the management risk involved. This has been tempered however through 2014, most noticeably for proven operators and mature facilities with strong cashflows in strategic locations.
The market has re-rated and re-priced the asset class since the earlier part of 2014, for these facilities in particular, as the “recession resilience” of quality self storage operations has again become apparent.
Led primarily by ongoing National Storage transactions since its public listing, the industry has benefited from the rediscovery.
Off-market transactions between well-informed parties now characterise the industry much more than they previously did. The market is again of interest to investors beyond the main operators, as it was in the early 2000’s, such as cashed-up institutions, syndicates and individuals in search of consistent growth and returns.
A greater degree of transaction evidence is now available in the self storage market. Due weight must be given however to particular issued involved with each property transaction eg actual vs. mature occupancies, the age and presentation of each facility, reported and actual cashflows and expense levels, each facility’s maturity and whether it is at “greenfield”, immature or established occupancy, the land area(s) per property, available on-site expansion/build-over potential etc.
In short, access to (often confidential) individual going concern sale or purchase data is central to the process of sale analysis, interpretation of market evidence and the reporting and use of capitalisation rates and discounted cashflow detail in contemporary finance, asset-value and institutional valuations.
Leasehold transactions are also growing in number as owners and purchasers investigate different ownership and tenancy criteria and source new price-points in an Australasian market that is maturing to provide such opportunity, as passive or older owners for example seek cashing-out, exit and/or business-change strategies. Leasehold interests present different risk profiles, finite ownership terms and lower entry costs.
In general terms the current market most negatively affects non-focused operators at the expense of modern and more professional, proactive and forward-looking owners. Management, as always, remains crucial.
In my view, to maximize a facility’s going concern sale price or to confirm a purchase price, access to and availability of an industry-standard management reporting system is of central importance, because the more transparent that both historic and current trading and operational data is, the more directly it will affect negotiations and due diligence in a fundamentally positive way, ultimately affecting (your) cash in the bank.