An alternative investment instrument – car parking spacesOctober 31, 2012 / By
The announcement of a third round of quantitative easing measures (QE3) and a further extension of the low interest rate environment until mid-2015 by the US Federal Reserve has already strengthened the confidence of investors in the local property market, with investment in property viewed as being one of the safest ways to hedge against inflation risks. For political purposes, the Hong Kong Government has imposed certain austerity measures to minimise speculative activity in the residential property market. This has forced many investors to explore opportunities in other sectors.
One investment class that is generally overlooked is the private car parking market. In recent years, there are about 15,000 – 20,000 net increase in private cars (excluding commercial vehicles) to be added to Hong Kong’s roads each year, representing a growth rate of 3 – 5% per annum. The average transacted price of parking spaces in many large-scale residential estates, meanwhile, has increased by more than 20% over the first three quarters of 2012, outperforming most other property sectors, with the exception of street shops.
In addition to the macro-economic factors contributing to this rise in the prices of parking spaces, some micro-factors have made this asset class an attractive investment instrument. First and foremost, the amount of initial investment required is low compared with other property sectors. Currently, the average asking price for a car parking space in most large-scale residential estates in Hong Kong ranges from HKD 0.6-1.5 million, which is affordable for many investors. Such small investment lump sums can also minimise the applicable stamp duty to just HKD 100 for the property transacted for less than HKD 2.0 million. Furthermore, compared with residential property, investment in car parking spaces can save on fitting-out costs, which erode the net return of holding assets. Finally, market yields, which compressed by 80-100 bps over the first three quarters of 2012 to around 5% at end-3Q12, are still at relatively attractive levels compared with those derived from other property classes.
Nevertheless, there are some considerations that investors should take into account before entering this market. Due to the small investment amount, some banks may not entertain such small-scale business or may be unwilling to offer mortgagors an attractive interest rate. This can be a barrier for those seeking high leverage. In addition, potential investors should also consider the ratio of housing units to car parking spaces, which can affect occupancy and growth prospects.
In short, it is not impossible to see the transaction prices of car parking spaces appreciate further in coming months provided that investment market sentiment remains resilient. Meanwhile, the ongoing rent increases are expected to continue, but at a slower pace than the growth in prices, which will likely compress market yields further in the near future.