Pay and display

Car parks offer investors good potential for growth says Christine Senior, and they have more commercial potential than first meets the eye

Car parks may be the unglamorous end of real estate, but they do inspire passion in people who take them seriously. And a lot of people do take them seriously, particularly investment managers of some the largest, most innovative pension funds.

Dutch pension funds have been the most active in exploring car parking as an investment. Several Dutch pension funds, including ABP and PGGM, have invested directly in car park operator Q-Park, which has built up a parking empire across Europe. The company owns and operates car parks in 10 countries, with 570,000 parking spaces, and plans to expand even further.

Q-Park's strategy is to make parking a car as pleasant an experience as possible. To that end it provides security with 24-hour service and surveillance cameras, and on-site personnel who speak different languages. It also provides toilets, umbrellas, baby buggies and even heart defibrillators. It actively courts customer loyalty. "More than 75% of our clients come back," says Ward Vleugels, chairman of Q-Park.

The first feature necessary to make a car park a good investment is its location. Obviously a car park is not a destination in itself: people park because they want to visit something else, be that a shopping centre, airport, hospital or college or anything else.
Thomas Pohle, director business unit institutional investments, Bouwfonds Asset Management, describes what makes the ideal type of car park: "You want a car park where people want to go because they have something to do there, and it has to be in an area where there is paid parking for a larger area.

"We prefer commercial points of attraction but sometimes tourism can be a strong point. A leisure activity combined with commercial can be interesting - a cinema complex with a shopping centre, or hospital and theatre is always good, because you have people coming any time of day."

Bouwfonds has launched a European Real Estate Parking fund which invests exclusively in car parks. The fund will acquire assets worth €300m, €130m of which has already been invested. The fund invests in Europe: so far it has 13 car parks in France, Spain, the UK and Belgium, and will soon add some in Germany to its portfolio.
Congestion is good for car parks because it increases demand. That affects the sort of cities investors find most attractive.

"If you live in Des Moines, Iowa, there's probably not a lot of demand for car parking, if you can park on the street," says Stephen Vineburg, global head of infrastructure investment at First State. "If you live in New York or London it's pretty hard to park on the street. You need people prepared to pay, people who ascribe monetary value to their time and to the security of their car, and who are prepared to pay for the convenience."

Critical to the success of a parking investment is to tie in with a good operator as a tenant. Owners have to rely on operators to keep it clean, well lit and secure, and to maintain the lifts and gates and so on, so people keep on coming. A long-term car park needs fewer personnel, but for short-term parking you need staff on site. A skilful operator will also be able to add value through offering other services such as car valeting, marketing via advertising space, or tie-ups with other local businesses to offer discounts.

Scale is also important, says Peter Hobbs, head of global real estate and infrastructure research at RREEF. "The ideal is to shift from pay as you go to getting a contract with users," he says. "You want to keep occupancy up as high as possible, then you can sell other services. You want a scale of business around a country or region, then shift as much as possible to contractual."

But sourcing suitable assets to buy is not always easy. There is certainly a shortage of good investment opportunities: Ward Vleugels says that 80% of car parks in Europe are not profitable.

Pohle admits that it has been harder than he had anticipated to find suitable assets to buy. "Car parks are often community-owned or hospital-owned and there are lengthy procedures to convince them to sell off their asset," he says. "You have to take into consideration a long period before you get approval. That usually doesn't happen when you talk to a bank or a developer."

Sourcing suitable properties has also been a problem for Capital Alliance Partners, sponsor of 3E Car Park Investors, a Luxembourg-based investment fund investing in car parks in central and eastern Europe. Capital Alliance has teamed up with ILF consultants and engineers, and car park operators Apcoa and Central Parking Systems for the project, which involves both acquiring existing car parks and developing new ones. The company has already raised €50m from institutional investors, including pension funds and funds of funds, and its target is €250m.

"The car park market is very fragmented," says Arnaud van der Wyck, managing partner at Capital Alliance Partners.  "Often they are not huge deals especially if you are buying existing car parks. It's often owned by different members of families that have had it for generations. It's difficult to get the deals done. It's not a professional market where you buy an office building from a developer who is a professional."

Eastern Europe is particularly ripe for car park expansion because of its economic development, rising wealth and an expanding car owning population.

"The fundamentals of eastern Europe are good," says van der Wyck. "When people are making money the first thing they do with it is they buy a car. Already it's completely congested, travelling through cities is a nightmare. Car parks are the solution. Local mayors are seeing the problem and realise they need to do something about it. We provide a one-stop-shop solution for the municipality."

Eastern Europe also finds favour with Saba, the car park operating subsidiary of Spanish infrastructure manager Abertis. Saba runs car parks in four European countries plus Morocco and Chile.

"All developing countries that don't yet have car park infrastructure and need to resolve the mobility problem in their city, for example eastern Europe, offer good opportunities," says Jordi Diez, deputy managing director of Saba. "In addition, the country should be politically stable and with a solid and reliable legal framework, as well as having an open financial market with the possibilities of obtaining financial resources in local currency over a long period."

Many institutional investors are quite likely to own car parks as part of other real estate assets: many shopping centres, or industrial estates, or residential blocks come with a car park attached. These may not be being used in the most profitable way, according to Emma Sinclair, managing director of Mission Capital, an AIM listed company that owns car park operator KML.

"There is probably something else you can do with your car park space that will help you make some money," says Sinclair. "You have to think with a car park it's not just a car park, who else might want to use the space? Other potential users are shoe shine companies, dry cleaners, car clubs, car wash companies. That helps you create value on your site."

Dedicated car park funds are still rare, but investors can still invest via niche funds with a mix of assets, which might also include student accommodation, medical centres, and car showrooms, alongside car parks, according to Greg Wright, a principal at Mercer.

"That might include funds that we call high lease to value or HLV where you are looking for the property investment to act as a bond proxy rather than a broad conventional market exposure type of fund," he says. "You are looking for something generally focussed on income and generally low risk and without necessarily high return potential."

The aspect of car parks that appeals to institutional investors is the regular liability-matching cash flows. This income stream is pretty well guaranteed to rise at least in line with inflation, but it could be much more.

"Pension funds are interested because of the risk profile and anticipated growth," says Pohle. "You see tariffs rising all over Europe - often by more than just inflation. Fifteen years ago in Amsterdam parking was about €1.50 an hour, it's now over €4. Inflation was maybe 40% but car parking has risen maybe 250% in total. These are very attractive growth numbers. But it's not going to continue at that pace."

Parking is also something that is able to weather economic downturns with relative impunity, given the right location. People will always need to do their regular weekly shop, and hospitals or colleges attract users and visitors, whatever happens to the economy. Even high oil prices have failed to dampen people's love affair with their cars, so however much tariffs rise, demand for parking remains relatively stable.

Pension funds find car parking attractive because it is a typical infrastructure asset, according to Hobbs. "Infrastructure provides long duration - many of these do have long leases or long revenue streams and a high yield. They are a diversifier. It tends to be more innovative pension funds that are interested."

Vleugels, whose own company has major pension fund investors, says pension funds like car parks for the diversification and the stability they provide. "They like to invest in housing, offices, retail - and now parking," he says.

"Secondly, when you own an office and the company that is leasing ends the lease contract, you have a major problem. We have more than 350 million different clients coming in and out of our garages. So the risk if someone comes or doesn't come is much smaller. Our cash flow is much more stable than other comparable investments for pension funds."

Vineburg also highlights the steady income streams from infrastructure assets in general which attract institutional investors.

"The inherent attraction is the robust income streams, whether that robust income stream comes from a monopoly asset like an airport, or a regulated utility like a water company, or a premium car park. Where there is strong certainty about the cash flow, that is what investors are really after. If Wall Street catches a cold overnight they don't want to worry if that will impact their portfolio."

But inevitably investing in car parks is not risk-free. One danger is that the local authority might change its policy on parking. If street parking is expensive, the local council might cut prices in response to local opposition, which would make the commercial car park less attractive.

Vleugels says local politics is a particular source of risk: "The biggest risk is the local government and what their strategy is towards the accessibility of their town. Do they want more public transport or do they prefer the car? These are political issues which can change periodically when there are new politicians that are controlling the city. That's our biggest risk because it changes."

The move to a ‘greener' agenda, where local councils are trying to wean people away from cars and on to public transport in city centres, could also be a threat.
"There are policy initiatives with the objective of moving people from cars to public transport or smaller cars," says Vineburg. "There is a risk a city like New York, London or Sydney may put a levy on you to make it more expensive to park or maybe restrict access. Or there are macro factors - if the cost of oil is at $100 a barrel people think twice about using their cars."

But Van der Wyck discounts the effects of the rising anti-car environmental movement, at least for the new wealthy in booming eastern Europe.

"There are no statistics to show public transportation is increasing in comparison to private," he says. "When people make money, they buy cars, they don't buy bus tickets."

Other threats come from local competition. "A CBD car park is always exposed to the risk of someone building an office block next door and putting in a car park and providing competition to you," says Vineburg.

Wright highlights that liquidity as an issue with these types of assets: "The main problem potentially is around liquidity. It's a niche area and if you wanted to come out it might be difficult to find alternative buyers. "But I think you go into these things with a buy-and-hold mentality. As long as you are prepared for that and realistic about returns, on the face of it it seems quite a suitable sort of investment for a pension fund."