The car parking sector is starting to attract interest from investors, but a lack of liquidity could pose a barrier to entry. Lynn Strongin Dodds reports
Car parks are unlikely to be top of the agenda of investors looking to diversify into alternatives. But recent evidence suggests the sector should not be overlooked. As with many real estate markets, ‘location, location, location’ is the mantra.
“Location is a prime focus because it determines the success of the car park,” says Bart Pierik, managing director parking of Bouwfonds Investment Management, which manages more than €500m of assets and was the first European fund to venture into the sector. “We like densely populated and economically strong cities with strict and enforced parking policies that have different sources of visitors.
“This includes office, leisure, retail, residential and tourism. While we will invest in car parks attached to hospitals, we tend to avoid airports because turnover is tied more to the economy. In general, we contract long-term, indexed leases yielding stable cash flows and income growth above inflation.”
Bouwfonds’ European Real Estate Parking Fund was first launched in 2005, followed by the second version seven years later. In July, it made its first foray into Ireland with a €15m purchase of a multi-storey car park in Dublin situated in a mixed-use environment with residential units, shops, offices, hotels, bars and restaurants. It was the fund’s seventh acquisition, increasing the size of the portfolio to €135m, and follows the low-risk profile of the other deals in Leipzig, Amsterdam, Groningen, Oslo and Sheffield.
“The strategy of the first fund is similar to the second in that we are looking to diversify by country and operators,” says Pierik. “One of the biggest changes we have seen over the past decade is that operators have become more significant. Twenty to 30 years ago, car parks were dark places that were not well maintained. Today, we expect certain standards in that they should be well lit, have good accessibility and are safe and secure. We are looking at opportunities where we already have car parks but have also just bought in Ireland and are interested in the Italian cities of Milan, Rome and Turin.”
Belgium is also attracting attention. The Canada Pension Plan Investment Board (CPPIB) recently bought a 39% stake in private European car-park management company Interparking for €376m, from AG Real Estate. The Brussels-based group has operations in nine countries in Europe, consisting of 657 car parks in 350 cities, with leading market shares in Belgium and Germany.
According to Andre Bourbonnais, head of private investments at CPPIB, the geographically diversified, high-quality car parks fitted well into its infrastructure programme, which seeks to generate stable, predictable cash flows.
Other benefits of car parks, Pierik notes, include resilience against economic downturns and their long leases, which tend to include annual indexation for inflation. They are strong performers, although garnering information can be difficult as, often, these facilities change hands in private deals where the details are not disclosed. The Dutch Association of Institutional Investors (IVBN), for example, is trying to rectify this with a new database where members can upload their real estate transactions.
The latest IPD data show that Dutch car parks turned in a 9.5% average return between 2004 and 2012, outperforming all other Dutch real estate categories during the period. Retail came closest with an average annual return of 8.8%, but offices and residential lagged well behind with average annual returns of less than 5%. The direct income return generated by car parks of 6% in 2012 was similar to that of retail but higher than residential, which was 4.3% and lower than the direct income return generated by offices at 6.6%.
These same attractions can be found in the UK, but deals are thin on the ground. “We are definitely seeing a greater interest in alternatives such as car parks,” says Shaun Roy, partner at Knight Frank. “The rationale is that they are a business critical assets with a long-term lease and fixed rental increases. They are not often openly traded and there is very limited stock.”
Roy adds: “However, like any specialist real estate, it comes down to the covenant and the understanding of the specifics of the business. In this case, the focus is on how many cars are coming in, what the charges are, whether it is next to a shopping centre or hospital or airport, and who the operator is. In the UK, there are around four to five deals a year with the standard investment involving either letting to a city council or operator. If government-let, they tend to trade at 4% to 4.25%. The returns are more limited and there is less risk than if it is run by an operator where the yields are around 6% to 6.5%.”
Jordan Jeffery, head of retail management at JLL, also sees investors looking more at the integrated model. “Historically, in the UK a car park was simply considered an amenity of a shopping centre, but now they are seen as very much part of the shopping experience and investors want the whole package,” he says. “There is also a conscious effort to enhance the value and we have closely worked with clients to improve the lighting, cleanliness and safety. Our clients are also making better use of technology such as installing specialist lighting equipment that automatically indicates where there is a vacant car space and directs the customers accordingly.”
Despite the higher profile, finding the right car park deals can be challenging. “It is not a very liquid investment market and you have to make a lot of effort to find a property,” says Pierik.