Corporate Q&A

Thinking inside the box

Self-storage is a new but fast-growing sector in China: CMS wants to profit

Hans-Kang-w

Tso: China’s next unicorn founder?

People in China are increasingly in need of extra storage space; urbanisation, rising home prices and higher disposable incomes are contributing factors. Self-storage in the US grew rapidly in the 1970s, helping to create one of the world’s biggest real estate investment trusts (REIT), Public Storage, based in California with a market capitalisation of $36 billion. And self-storage companies are starting to emerge in China, which is roughly the same size as the US in geographical terms but has four times the population.

One player is China Mini Storage (CMS), which received an investment of $28 million from Hong Kong-based real estate investor InfraRed NF last February. CMS currently operates 28 self-storage facilities in four tier-one cities: Beijing, Shanghai, Shenzhen and Guangzhou, as well as 20 lockers for intraday renting in Beijing. WiC talked to its founder Alan Tso, and InfraRed NF’s Chief Investment Officer Hans Kang, for more on why self-storage is growing so rapidly in China.

What inspired you to focus on self-storage?

Alan Tso: Self-storage is a globally recognised business, but was unknown and undervalued in China. Back in 2013 I visited a residential neighbourhood of Beijing and discovered that the property manager had erected 40 storage rooms in the car park in the basement. There was no security, no cameras and no humidity control – literally just a wooden shelter. [Yet] they were all filled up. So we made our first pilot test in the same neighbourhood, which is a popular area among foreign expats. Fortunately, it turned out to be quite successful, so we started building more.

We are now in our fourth year and about 95% of our customers are locals, of which 95% are first-time users. Our latest facility, which opened six months ago, has achieved a 75% occupancy rate.

It’s actually not very hard to educate [Chinese] on the benefits of using self-storage facilities. This is similar to the budget hotel opportunity in China. Before its emergence in 2004-2005, there was all sorts of low-end accommodation. There was demand, but people just needed better-quality products. Moreover, the factors that you see in other successful self-storage markets are emerging in China’s big cities.

What is driving the demand for storage in China?

Hans Kang: For China [self-storage] is an exciting story. In Beijing and Shanghai the sector is experiencing over 40% compound annual growth, in part thanks to Millennials that are not compromising on their lifestyles and the fact that people tend to be more mobile.

Tso: Through my previous job (in investment banking) I travelled to 33 cities over the past decade. I noticed that apartments were getting smaller and smaller. As an example: studios in Beijing, built in the late 1990s, were about 120 square metres, but now they are just 30. It seems to be an inevitable trend that people build nano apartments in metropolises. You see this in Tokyo, Seoul and Hong Kong and it is the same for Beijing and Shanghai, particularly when property prices have gone up nearly 5-8 times over the past decade. These cities are heading in the same direction: accommodation is becoming very small, very compact and very expensive.

Kang: One project we are working on is the conversion of hotels into rental apartments. Initially we focused on one-bedroom apartments, but we ended up building more studios because there is a strong demand. These units are normally 30-40 square metres. So people definitely need [extra] space to store [their belongings] – of which they are accumulating more due to the growing trend towards a consumption society in China. We asked Alan to help provide a self-storage service in the basement for the people living in the rental apartments upstairs. There is demand because people cannot afford to buy bigger apartments and they do not mind renting smaller apartments as long as the quality is good.

Tso: Density and price escalation is one factor that stimulates the demand for self-storage and this is particularly the case in Hong Kong.

But in China there are other factors. In 2014 the government announced the relaxation of birth control policies, which means people can now have more than one child. Previously, parents would simply throw away the nursery furniture for their first kid or give it to others. But now they might consider storing the items in case they have a second child.

There is also e-commerce. In China there are 30 million individual online retailers. They are mostly mom-and-pop sellers with online stores on Alibaba’s Taobao. They all need storage rooms for their inventory.

Moreover, most universities in China do not offer trunk [storage] rooms for when students are away for three to four months during the summer. Each of these is unique demand in China for renting storage space.

Any other areas where the circumstances in China are different?

Tso: The government’s ban on ‘illegal’ underground dwellings in Beijing and Shanghai, mainly populated by ‘ant people’ (see WiC58) has released a lot of basements for rejuvenation. So far we have acquired three properties in Beijing. One is the basement of a residential neighbourhood housing 400 ant rooms; the others are basements of retail podiums in residential neighbourhoods.

How is your self-storage facility different from rivals?

Kang: Imagine you’re in Beijing, you’re looking for a self-storage facility and you’ve opened your WeChat. Our mini-app will give you real-time availability for all our facilities under management. You then select the size of the units you want to rent (which could range from 2 cubic metres to 400 cubic metres), you sign a contract online and you pay your deposit. Afterwards, we issue a digital key to your phone for opening the gate and the storage without needing anybody on-site. We have a 24-hour surveillance system to ensure the security and we also do regular physical checks.

Tso: The biggest difference between traditional self-storage and smart self- storage facilities is the smart locks, which are tied to the back-end of our platform. With real-time management software, we manage all our spaces from a control centre. We can also perform real-time online ID checks against the police database. We are the first to do it in the industry.

We have seen people start to copy us, with WeChat interfaces that look exactly like ours. But we will invest what is necessary to help achieve high occupancy. A quarter of our users find us through search engines, and another 25% through social media. The remaining 50% are referrals by friends, property agents and house-movers.

But our emphasis, since day one, is on technology. We invest in research and development and in developing our WeChat-based smart self-storage product.

What are your commercial targets for the next few years?

Tso: We see ourselves building a portfolio of 100,000 cubic metres of space via self-owned and leased properties across four tier-one cities in three to five years. After a merger with another operator in February, which allowed us to acquire seven facilities in Guangzhou, our operations already span Beijing, Shanghai, Guangzhou and Shenzhen. Should we reach our goal, then who knows? There are a range of options to grow further including more investment and potentially raising funds from the capital markets.

How else do you diversify revenues?

Tso: While already good, we are trying to create a better user experience for customers. Delivery is part of it, especially for e-commerce retailers [selling on Taobao], which account for over 60% of our Guangzhou operations. They need logistics every day.

And if you look at Public Storage in the US, the world’s biggest self-storage operator, 10% of its revenue comes from selling insurance online. So we are looking at partnerships with insurance companies where we can effectively work as their point of sales.

We try to bring more convenience to our users with ancillary services in insurance, logistics (pick up and delivery for the e-commerce retailers), house-moving or even selling some of our customer’s goods as second-hand items. And because we have everything computerised in real time we know our customers better, including data related to self-storage that is often linked to life “changes” such as getting divorced.

Kang: That may create other cross-selling opportunities as we bulk up our portfolio. Overall, it’s another big business opportunity and we’re very bullish. All the main trends in the Chinese market suggest this business is only going to get bigger – surpassing the US, where it is a very large industry.


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