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Rising inflation is affecting Real Estate investments

Updated: Aug 8, 2023

Rising inflation is affecting Real Estate investments

For those who still doubted it, inflation is back on a global scale, especially in Europe where it has more than doubled expectations over the last six months. In fact, it has reached the record rate of +10.0% in September 2022 (+0.9 p.p. vs. August 2022 and +5.9 p.p. vs. September 2021).

This major increase is mainly due to the current geopolitical situation and the recent Covid-19 pandemic, which has caused a general shortage of primary resources and stressed the world’s supply chain.

Unfortunately for Real Estate investments, it means higher cost of financing and more stringent underwriting from financing institutions. Thus, being able to accurately identify the right assets in its own market and properly budgeting the project economics have never been more important.

Chart 1. Euro area annual inflation rate and its main components, %, 2000-22

Source: Eurostat

Self-storage overperforms other asset classes in high-inflation environments

In this challenging context, the self-storage asset class has already proven its resilience: it overperformed all other Real Estate segments during the financial crisis, as well as during the COVID-19 pandemic.

Chart 2. Self-storage rate bill as % of wages in UK, £ /sqft, %, total annual return, 2005-21

Source: Citigroup

Chart 3. Frequency of price actualization, months

Source: SSA (Self Storage Association)

Several intrinsic factors contribute to the self-storage resiliency and attractiveness as an investment opportunity:

1. With hundreds of customers per facility, self-storage is naturally preserved from the risk caused by client concentration;

2. The short-term rental contract model enables to reflect inflationary pressure into rental pricing, by renewing terms on a regular basis;

3. The high operating margins (up to ~60-65 EBITDA % - especially for freehold businesses) can bear reasonable cost increases;

4. The reduced use of utilities /workforce limits the exposure to price variations.

Recent researches show that self-storage rents, as a percentage of wages in the UK, have decreased continuously over the past 10 years, showing a higher purchasing power for customers (Chart 2).

Source: SSA (Self Storage Association) In any case, self-storage operators need to decide the right moment to adjust prices. For each month in which prices remain constant, the business is losing a significant portion of revenues in real terms (Chart 3).

About Pithos Capital

Pithos Capital is a thematic platform dedicated to Western European self-storage opportunities. With dual expertise as a private equity sponsor and a real estate investor, Pithos Capital has been active in self-storage for more than 20 years.

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