Self-Storage May See European Property's Biggest Profit Growth

British companies that rent out space to store your old exercise bikes and rusty golf clubs may offer the best earnings growth among European property stocks as they cut vacancies that mounted in the housing slump.

A pickup in storage occupancy and rental rates in recent months suggests that Safestore Holdings Plc, Big Yellow Group Plc and Lok’nStore Group Plc may be past the worst following an ill-timed expansion push, according to Paul Pulze, an analyst at Evolution Securities in London.

“If the economy starts to improve and the companies can drive demand for the product, there’s significant upside relative to other real estate,” said Pulze, who has a “buy” recommendation on Safestore and a “neutral” for Big Yellow.

Safestore and Big Yellow, the two biggest U.K. storage chains, only need their facilities to be 40 percent full to break even, and any additional space leased is pure profit. That has helped convince analysts at Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley that the shares may outperform in an industry plagued by prospects of stagnant rents and property values.

A 1 percentage point improvement in Big Yellow’s annual average occupancy would lift earnings per share by 6 percent, while a 1 point increase in the average rental rate increases earnings by 3 percent, according to Bianca Riemer, an analyst at Morgan Stanley who rates Big Yellow “overweight.”

The typical large self-storage facility is a multistory warehouse located near a main road. The several hundred cubicles inside can be as small as 6 square feet or as large as a tennis court. Two-thirds of customers are private individuals, ranging from EBay Inc. traders to people in the process of moving.

Expansion Spree

Companies embarked on an expansion spree that lifted the number of stores by 36 percent from 2006 to 2008, according to members of the Self Storage Association, the body that represents the U.K.’s 350 million-pound ($550 million) industry.

Average annual rental rates then fell 2.8 percent in 2009 to 20.49 pounds a square foot. Big Yellow said occupancy at its 32 oldest stores dropped to 69 percent at the end of March from 84 percent at the peak of the U.K. housing boom three years ago.

Safestore said on Aug. 31 that occupancy at stores across the U.K. and Paris rose by 3 points to 59 percent in the three months through July. Average rents climbed 3.5 percent from a year earlier to 25.17 pounds a square foot.

Investors haven’t shared analysts’ enthusiasm. Safestore, Big Yellow and Lok’nStore have declined an average 8.3 percent in the past 12 months, exceeding the 3.2 percent slide for the FTSE 350 Real Estate Index.

That probably reflects concern that few people can move to new homes in a real-estate market hobbled by curtailed mortgage lending, said Michael Burt, a London-based analyst at Execution Noble. He expects occupancy levels may grow at half the rate some other analysts are predicting.

‘You Are Gambling’

“If you are looking for a huge jump in earnings per share, you are gambling on mortgage approvals,” Burt said. He has a “buy” rating on Safestore and a “sell” on Big Yellow.

Since the self-storage industry started in the U.K. in the early 1980s, about 800 facilities have opened offering the equivalent of 0.52 square foot for every Briton, the most in Europe.

That’s still less than the 7.4 feet of storage available to each American or the 1.1 foot per Australian, reflecting the industry’s growth potential. The U.K. also has the oldest housing stock in Europe and the smallest average room sizes, according to European Union statistics.

More Stuff

“Current housing doesn’t reflect the need for more storage because we have so much more stuff,” said Simon Nicol, director of housing at the Building Research Establishment, a Watford, England-based nonprofit consulting body.

The storage companies are taking various measures to drive sales, in addition to trying to sell more insurance, packing materials and other accessories, which account for about 15 percent of revenue.

Safestore has targeted partnerships with large corporations, including supermarket chain Tesco Plc and EBay, while Big Yellow concentrated on developing its brand through distinctive yellow facilities in prominent locations in the London area.

“We have spent 10 years building the kit and the operational platform and now it’s a question of filling them,” James Gibson, Big Yellow’s chief executive officer, said in an interview. “It does require an element of patience.”

To contact the reporter on this story: Simon Packard in London at packard@bloomberg.net

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net

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