The demise of ‘renewables’ as an EIS qualifying business is now largely yesterday’s news but with substantial sums having been committed by investors to this asset class in recent tax years, advisers are challenged to find trading businesses who benefit from genuine asset backing as a possible alternative. Investors who have dined on renewables will see a significant hike in risk when moving to growth capital EIS investments and though the returns can be much more substantial, the downside can be a risk too far for some. Managed storage businesses usually trade from freehold or long leasehold premises and are thus balance sheet items which can provide a comfort blanket should things not ultimately pan out as planned.
So why might Managed Storage be a compelling option?
Managed storage is an industry in which a managed storage solution is provided to domestic and commercial customers. The business provides secure rooms or areas, in which customers can store their goods. Managed storage customers include businesses and individuals.
There are estimated to be over 60,000 storage facilities worldwide, of which 48,500 are located in the United Statesᵃ. From 2000 to 2005, over 3,000 new facilities were built every year with one in ten U.S. households now renting storage spaceᵇ.
Whilst the USA is by far the world’s most mature storage market, recent growth in other territories has been strong. Managed storage arrived in the United Kingdom in the early 1980s and demand has grown steadily since then with the UK market now supplying over 37 million square feet of storage space, an increase of more than 5% on 2014ᶜ. It is estimated that the total turnover of the industry in 2015 was circa £440mᶜ. The industry has proven to be counter cyclical and recession resistant with many operators reporting year on year revenue growth through the recent recessionᶜ.
Managed storage businesses have proved to be an attractive option for investors looking to capitalise on increasing demand for storage solutions resulting in continuing, solid growth in this sector of the economy. The low level of fixed operating costs in the industry together with the large number of alternative uses for the underlying assets, has also provided an element of downside protection to their investment. Economic data and trends analysis suggest there is significant headroom for growth in the short and medium term.
The primary drivers of retail storage demand are generally social factors such as moving home, marriage, divorce, retirement and bereavement. For businesses, storage proves useful for a number of reasons including start-up workspace solutions, storing archives, stock or office equipment. Increased public awareness of the industry has also contributed to its growth. The surge in demand from online traders has also contributed to this growth.
Current lettable occupancy rates across the UK are estimated at 73%, a 4% increase on the previous yearᶜ, despite new, additional capacity, which indicates that current demand for the product is growing slightly faster than supply, whilst yields per sq. ft. have also been improving in recent years.
Growth in the UK Industry is being driven by increased awareness. Smaller houses and an increase in post-recession, housing transactions have contributed to an increase in domestic demand whilst higher business rates have made managed storage a cost efficient option for businesses in general.
Investors generally cite five key reasons which combine to create the appeal for them:
- Storage business models have proved resilient through the recent financial crisis;
- Managed storage has good customer diversity. It does not rely on one single, large customer;
- Stable and relatively secure cash flow (recurring earnings);
- Low and relatively predictable operating costs combined with attractive rental prices per square foot (compared to the leisure and healthcare sectors);
- Investment is usually underpinned by the businesses trading from freehold or long leasehold premises giving a level of downside protection to their investment.
There is a lot to like about this asset class and it is easy to see how it will appeal to investors who are seeking to bridge the gap between their former home in renewables and the generally higher stakes of growth capital investments. But there will never be any substitute for selecting product managers with pedigree and capability as offers are likely to vary significantly between one product provider and another.
Blog by Ian Battersby
Business Development Director of Seneca Partners Ltd, manager of The Seneca Managed Storage EIS Fund
Risk Warnings – EIS investment and investing in the managed storage sector is not suitable for everyone. Your capital is at risk and you may get back less than you invested. There is no established or ready market for the sale of shares in unquoted companies and you may experience difficulty in realising them (for value or at all). You should seek financial and tax advice before making any investment.
ᵃ Source: Self-Storage Association (USA)
ᵇ Source: New York Times Magazine
ᶜ Source: Cushman & Wakefield annual industry survey 2016