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Tiny Hong Kong homes offer big opportunity for storage firms
[HONG KONG] People often complain about Hong Kong's notoriously tiny apartments, but for investors like Blackstone Group LP, opportunity can be found in small places.
Welcome to the world of self storage.
The majority of Hong Kong's 7.4 million residents live in cramped homes with limited space for clothes, shoes, books, sports gear and other items. So there's a desire to find somewhere else to store non-essential belongings.
"People don't want to give up their stuff, things that they have an emotional attachment to," said Ralph Myers, a 38-year-old who started using a storage unit six months ago. The theatre set and costume designer pays HK$250 (S$44) a month for the space, which is packed with his own furniture.
"Apartments in Hong Kong are so small there's not that much difference between my storage unit and my place," Mr Myers said in an interview.
"Essentially my storage unit looks like a furnished apartment itself - bed, chairs, table and so on - just without a kitchen or a bathroom."
Chris Heady, chairman of Asia Pacific and head of Asia real estate at Blackstone, described the sector as "interesting" at a panel discussion at the Wharton Global Forum in Hong Kong last month.
"It's not a glamorous business necessarily, but a good business."
Blackstone invested a reported HK$420 million in MiniCo Self-Storage in March 2015. The company is now called Minibox Self Storage.
Asia 'Massively Under-Serviced'
Self-storage supply in Hong Kong in 2015 was 0.44 square feet per person - way behind the USfigure of 7.8 sq ft, according to a report by CBRE Group Inc. At the end of that year there was a shortfall of about 200,000 sq ft of self-storage space in Hong Kong.
Simon Tyrrell, managing director at E3 Capital Partners in Hong Kong, said the city is "the least developed" core Asian market when it comes to self storage. E3 Capital acquired an operator called Big Orange Self-Storage as part of a takeover. It has sold that, but plans to start a premium service through its business RedBox Storage, Mr Tyrrell said.
"If you look to Western markets, Asia is massively under-serviced and with the rise of the middle class, logic tells you that demographically the industry has to be set for a massive increase," he said.
In Tsing Yi in Hong Kong's New Territories, a 20 sq ft storage unit - large enough for a two-seater sofa, painting, small dresser, mattress and 24-inch TV - costs from HK$400 for a one-month contract.
A 100 sq ft unit - big enough to take the above items plus a filing cabinet, five document boxes, a lamp, a computer, a golf bag, a chair, two bags of clothes and a dining table - costs from HK$2,750 a month.
Jones Lang LaSalle said in a report last month that the sector is attractive to Hong Kong investors because of its strong regular income growth and the fact that high occupancy levels are underpinned by a stable tenant base.
Millennials and the younger generation are typically more open to self storage, according to Bob Tan, JLL's national director for alternatives, Asia Pacific.
"If you go one or two generations back, people like to have their stuff in their own houses, they don't want to go outside and use a third-party provider."
Around three-quarters of self-storage customers are individuals. Factors driving demand include marriage - couples combine two households into one - and divorce, where one person moves out and needs somewhere to store possessions. The rising death rate is another driver, as people inherit furniture and heirlooms that won't fit in their homes.
"As people pass on, their belongings must be sorted and cataloged by their relatives," the CBRE report said.
"Self storage is the solution when this event occurs."
The widening gap between property prices and wages has also forced some homeowners to downsize, reducing space for their belongings.
The tininess of Hong Kong homes is well documented. CBRE said the average household space per person is just 167 sq ft. That compares with 247 sq ft in Singapore, 402 sq ft in the UK, 853 sq ft in Australia and a cavernous 980 sq ft in the US. Colliers has estimated that 852,000 private residential units - 76 per cent of the total - lack dedicated storage space.
Skip Schwartz, managing director of private real estate equity for Asia Pacific at Heitman LLC, a Chicago-based property investment management firm, said there is a "compelling" case for self storage in Hong Kong. He said he's looking for a joint venture as a way to enter the market.
The government tightened guidelines for self-storage operators after a blaze at a building in Kowloon containing storage facilities killed two firefighters last year.
"The fire was the biggest accident since self storage started in Asia," Luigi La Tona, executive director at the Self Storage Association Asia in Hong Kong, said in an interview.
Some operators - mostly mom-and-pop businesses - closed due to pressure from landlords and the cost implications of having to meet enhanced fire standards. There are now about 420 facilities, down from 500 facilities before the fire, according to the SSAA.
JLL's Mr Tan said he expects the Hong Kong self-storage market to post 3 to 5 per cent annual growth over the long term.
"Self storage doesn't require many staff, and operators tend to use a lot of automation for invoicing, security and access," he said.
"It is also easier to invest, manage and exit when compared to other alternatives."