What you didn't know about self-storage investments in Hong Kong

Self-storage sites in HK are relatively small.

Amid observations that there is increasing demand for self-storage investments in Hong Kong, the pros and cons of leasing and buying are worth noting, in line with investment risk and return.

According to a report from Colliers International, for leasing, it estimates that it takes about 18 months for a new 20,000 sq ft self-storage site to reach a stabilized occupancy rate at 90%. This results in a payback period of about 4.5 years. Assuming a 9 year lease the Internal Rate of Return (IRR) is estimated at more than 30%.

Meanwhile, for buying, if a property is purchased for conversion into self-storage the acquisition cost accounts for over 85% of the total investment amount (assuming a 20,000 sq ft site).

Colliers International calculates the IRR over the same 9-year period at approximately 15% (assuming capital growth in line with the annual inflation forecast by the Economist Intelligence Unit of 3.4% over the next few years).

Here’s more from Colliers International:

Although the internal rate of return of this buying case is lower than the leasing case, the returns of the buying case are more secure. In Hong Kong, the typical lease term of industrial premises is 2 to 3 years.

The self-storage operations may make a loss if they cannot renew their lease after the first lease term as the payback period would be about 4.5 years. Securing a long term lease is critical to ensure viability.

Whilst this analysis of buy versus lease appears to support leasing, it does not factor in the potential capital gains if the capital value of the building outperforms forecast inflation.

The self-storage investment opportunity has often been overlooked because the existing size of the sector is relatively small in Hong Kong.

Virtually all of the 2.8 million sq ft of self-storage area is established in existing industrial buildings, which represents only a small portion of the more than 200 million sq ft of existing industrial property stock.

There is a shift of investment demand from traditional to non-traditional property sectors in view of higher returns. Self-storage gained real estate investors’ interest because the sector provides a better return when compared with the traditional option of buying industrial premises simply to lease out.

Existing self-storage sites in Hong Kong are relatively small. About 80% of the existing self-storage sites have a gross floor area of 10,000 sq ft or less.

Assuming a floor area efficiency of  70%, a 10,000 sq ft-site provides about 233 self-storage units with a net lettable area of 30 sq ft. According to self-storage operators, it is estimated that about 25 leases could be sold per month. Based on these assumptions, a 10,000-sq ft self-storage site would be fully occupied in less than 1 year.

Regardless of the sizes of the establishment, the staff requirements for operating self-storage sites are virtually identical. We conclude that there is adequate local demand in most locations to justify 20,000 sq ft and larger.