The role of bank funding in the growth of the self storage industry: Trends, challenges, and opportunities

22 November 2024

Troy Williamson

Picture of Troy Williamson

Troy Williamson

22 November 2024

Troy Williamson

Picture of Troy Williamson

Troy Williamson

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This article is repurposed with thanks to Storage Association (November 2024, Bank Funding Page 17)

In recent years, the self storage industry has become a cornerstone of the real estate sector, showcasing remarkable resilience and growth. As this sector continues to evolve, access to capital, particularly through Bank & Non-Bank funding, has emerged as a critical factor in its expansion.

Key trends in bank funding for self-storage

Increased investment appetite: Big Four Banks have shown a decrease in funding appetite for self storage projects despite to the sector’s strong performance and relatively low risk. Typical Loan to Value Ratio’s (LVR) are capped at 50%-55% depending on occupancy levels for the asset. Current interest rates range from 6.50% – 7.50% pending risk analysis; typical interest times coverage ratio’s (ICR) range from 1.50x – 2.00x.

Emergence of Non-Bank lenders: Non-Bank lenders continue to enter the market and have developed specialised financial products tailored to the unique needs of the self storage industry. Their entry is correlated with the decreasing major bank appetite; their view is the self storage sector remains strong due to high demand and asset class representing a low risk profile. Appetite for construction loans starts at LVR’s >60% with extended tenure to allow the facility to trade up occupancy. ICR requirements are typically 1x which allows sponsors to reposition stressed assets.

Big Four Vs Non-Bank: A common misconception in the market is business operators are adverse borrowers for using a non-bank lender. Non-Bank lenders provide solutions to meet the clients short-term needs; with the intention to refinance to a major bank or allow time to effect a sale. At higher LVR’s and less conditions, Non-Bank lenders can be better value for money and require considerably less capital contribution from borrower.

Challenges in securing bank funding

Rising interest rates: A high interest rate environment will reduce ICR’s on assets which could trigger a breach of loan covenants. This can lead to more stringent lending criteria or reduced LVR’s.

Builder risk/uncertainty: All lenders have become increasingly cautious on a builders management and financial capability. For construction projects >$3m, lenders will undertake a due diligence on proposed builder which requires information like financial statements, past projects, management team etc. It’s imperative you advise the financier early in the process your intended builder to ensure they’re approved to undertake the project. Financiers will revoke their finance approval should builder not pass due diligence.

Bank funding remains a cornerstone of the self storage industry’s growth and development. As the sector continues to evolve, financial institutions play a crucial role in supporting expansion, innovation, and sustainability. While challenges such as market saturation and economic uncertainty persist, opportunities abound for operators and lenders to collaborate and drive future growth. By leveraging favourable financing options the self storage industry can continue to thrive and adapt in an ever-changing economic landscape. Using an experienced broker who specialises in the self storage sector is the best way to access/navigate all funding options in the market.