What you need to know about opportunities in franchised self storage businesses.

With a population of 5 million in Singapore that translates into an industry penetration of 0.24 square feet of self-storage space per person or one storage unit per 260th person.

By contrast, the penetration in more developed markets is above 1 square foot per person or about 80 people per storage unit. Singapore therefore has the capacity for further growth in the self-storage industry.

The self-storage industry is already well established in Singapore with the top four pre-existing operators controlling the majority of the industry’s approximately 19,000 storage units or 1.2 Million square feet of Net Lettable Area (NLA).

The first self-storage business started in Singapore in 2003 when Storhub commenced operations. The business did well and quickly attracted other operators: Store-it, Lock+Store, Extra Space and Big Orange had all opened by 2006.

All operators have followed a similar model of acquiring one site at a time through lease or freehold acquisitions.

That “fixed asset” model, where the self-storage operator also owns the physical building, usually adopts the following strategy:

1. Secure a site that offers medium/long term asset appreciation opportunity;
2. Put in place an operating (self-storage) model that generates sufficient cash flow to cover operational expenses and generates higher returns than through straight forward sublets;
3. Build a brand from scratch to facilitate this growth, and
4. Pursue a “mega-site‟ model of 60,000 – 200,000 sf per site to absorb significant operational outlay.

The aim is, over a period of 5 - 10 years, to have a portfolio of sites at appreciated valuations, have good and consistent cash flows from the self-storage businesses at high capacity utilisation levels and a brand to assure further expansion as the opportunity arises. The business can then later be sold (or further capital pursued) on the basis of those three aspects.

The challenge with this fixed-asset strategy is a very front loaded cash model where significant finance must be available to secure, convert and fit-out sites, which begin life essentially as large empty buildings. Typically, with this model, operators would be looking at 1-3 years before reaching profitable occupation levels, assuming the brand even takes off and successfully grabs market share.

But there is an arguably more effective alternative to this model, the franchise-based approach to self-storage. Commonly the way this works is as follows. Firstly, individual franchises are sold as one-off revenue and the franchisor retains a percentage of on-going revenues to cover their operational costs.

Secondly, the strategy is to go for maximum geographical coverage and exposure with numerous “dots on the map” whilst at the same time support the franchise brand through extensive marketing campaigns.

Rather than large mega storage sites, the preference with franchise is to go for smaller (7eleven style) sites with less cost commitment and no need for subtenants or long idle periods.

These “convenience store” type self-storage units will be fully climate controlled for long term storage and they will operate with market leading technology not easily copied by other brands. They must be open 24 hours a day, 365 days a year, giving customers access to their stored belongings any time they wish.

The franchise approach to self-storage operation is a strategy which ensures positive cash flow immediately requiring cash outlay only from the business planning phase and set-up costs for site 1, known as the Proof of Concept (POC) site.

The POC site is a necessary part of the business to attract and acquire new franchisees so they can “see & touch” the concept.

The returns for the forward-thinking self-storage franchisor, which looks not just at the POC site, but also the franchise fees and a percentage of on-going revenues from the franchised sites, are very attractive.

Meanwhile, on the franchisee’s side, the self-storage franchise is an attractive option for entrepreneurs, investors and even retirees looking to secure an income stream from a fairly low-maintenance business.

The model is also very attractive for existing warehouse and commercial real estate owners seeking an appropriate model to make use of space. With recent new JTC regulation forcing owners to occupy at least 50% of owned space this becomes particularly relevant.

Further, and importantly, with a franchise the site owner effectively separates the operation from the real estate. Therefore when the time comes to exit the investment the real estate can be sold separately from the franchise (the operational knowledge and execution), which is then transferred to the new owners.

Thereby the owner can exit the investment with no need to remain as part owner for operational consistency considerations.

Jes Johansen, Managing Director, Storefriendly Self-Storage Group