Why investing in purpose-built parking facilities makes sense

Saturday, 10 November 2018

Investing in purpose-built parking facilities is different to investing in other commercial properties such as shops and offices. In a recent prospectus for private and institutional investors in the Netherlands and Germany, Immo Group Holland outlines how investing in purpose-built parking facilities reduces the risk of lost income for property investors.

When most people think about investing in property they think about offices, industrial premises, shops and residential properties. In contrast to the standard property sector, in the purpose-built parking facility market the user is not the lessee: the user is the parking customer. In other words, purpose-built parking facilities represent a lower risk of lost income.

Steadier income than other commercial properties

Leases for purpose-built parking facilities tend to run for longer periods (generally from ten to thirty years, or longer) than for other types of commercial property such as shops and offices (often between five to ten years). If the lease is terminated early, this will not reduce the need for parking in the purpose-built parking facility concerned. In other words, parking income will be available instead of rental income.

When the lease on a parking facility is terminated early, the Asset Manager looks for a new lessee. If it proves impossible to find a new lessee to take over the lease immediately, the Asset Manager will look for a commercial party to operate the parking facility on behalf of the investor and at the investor’s risk until a new lessee is found. If necessary, the Asset Manager may take charge of operating the facility themselves for a short period.

Any reduction or increase in income for the investor will depend on the level of operating costs and the parking income generated during the period without a lessee. Since the investor would then receive the direct parking income, investing in purpose-built parking facilities is different to investing in other commercial properties such as shops and offices. These properties generally do not generate any income after a lease is terminated, unless the lease on the property is immediately taken over by another party.

Limited sensitivity to changes in the business cycle 

As part of the urban infrastructure, purpose-built parking facilities share some characteristics with infrastructure investments. For instance, predictable cash flow, income correlated with inflation, low correlation with other investment sectors and limited sensitivity to changes in the business cycle.

People will always want to park their cars

Mobility is one of the factors that support the effective operation of economies and societies. Since parking is a service derived from mobility, it also plays a key role in our daily lives. With sales of passenger cars still positive and increasing pressure on municipalities to reduce on-street parking, people will always want to park their cars in a purpose-built facility if the location is good. Investing in purpose-built parking facilities can be an attractive proposition.

Over the first nine months of 2018, EU demand for passenger cars remained positive (+2.5%), in line with growth expectations for this year. Looking at the five biggest markets, demand went up in Spain (+11.7%), France (+6.5%) and Germany (+2.4%), while car sales contracted in Italy (-2.8%) and in the United Kingdom (-7.5%).

In September 2018, registrations of new passenger cars in the European Union fell by 23.5%. However, this should not come as a surprise, as the introduction of the new Worldwide Harmonised Light Vehicle Test Procedure (WLTP) test at the beginning of that month caused an exceptional surge in registrations in August (+31.2%). As a result, most EU countries suffered double-digit losses in September, including the five major markets.

Source: European Automobile Manufacturers Association

Differentiated parking facility operating models

The parking facilities market is characterised by three forms of commercial exploitation:

  • Owner/operator: the owner holds the title to the parking facility and operates the facility as well. This gives the owner/operator the right to the operating result and the indirect return on the property (return on sale).
  • Operator: the owner may choose to conclude a lease contract with a parking operator in order to ensure a constant source of income.
  • Parking manager: the parking manager is responsible for the daily running of the parking facility and for the operational structure. The parking manager receives a fee for the parking management tasks which generally bears little or no relation to the parking revenue.

Purpose-built facilities promote urban mobility

The rise in passenger car ownership and increased mobility in combination with the shortage of parking spaces (particularly in inner cities) is intensifying the pressure on parking. This in turn intensifies pressure on infrastructure. Which is where purpose-built parking facilities can offer a solution.

For property investors, purpose-built parking facilities represent a relatively limited space which can help solve parking problems in inner cities and at target locations, including hospitals and other location clusters where people come together for social and other activities. According to investors, this fact raises the level of consumer acceptance for paid parking. In addition, the spatial planning structures in cities are changing. Urbanisation is no longer synonymous with the continual expansion of monocentric cities: rather it is becoming a more complex distribution of urban functions, with old and new centres spread across a larger urban area.

Upscaling of social and societal facilities is closely related to this trend: living, working, shopping and other activities take place in a more concentrated area. Additionally, ever more local authorities, including Amsterdam, are no longer issuing on-street parking permits to residents. The idea is that resident’s parking requirements should be met by purpose-built facilities off-street. These large-scale facilities place considerable demands on infrastructure. The locations must be easily accessible and offer sufficient parking capacity.

Continued demand for inner-city parking 

Property investors take the view that many inner cities in northern Europe are characterised by an intense concentration of functions. In other words, several functions such as living, working, shopping and recreation are concentrated in a limited space. They also constitute the core of a city in economic and social terms.

Five large operators in northern Europe 

Operator

Headquarter country

Total parking spaces operated globally

Indigo-Infra Park

France

2.1 million

APCOA

Germany

1.4 million

Q-Park

Netherlands

835,000

Interparking

BE

330,000

NCP

UK

150,000

Source: S&P Global ratings 

Since larger cities have a multifunctional centre, there is a permanent demand for parking services, round the clock. The parking facilities are fully supported by other functions such as shopping, working, living and recreation. The majority of people prefer to visit cities by car, regardless of whether the trip is for business or pleasure.

Price of parking rising

The price of parking in major cities has risen sharply. Research conducted by Detailhandel Nederland in 36 Dutch cities shows that on-street parking is now 13% more expensive than five years ago. The average parking price in those cities rose from EUR 2.31 to EUR 2.61 per hour in that five-year period.

Property investors note that the parking tariff is not dependent simply on supply and demand, but also on the municipal parking policy. This is determined on the one hand by a municipality’s need for policy to regulate passenger car traffic in the urban area, and on the other by the need to cover costs. Property investors see a trend towards increasing differentiation in parking tariffs, between on-street and purpose-built parking facilities, and between different places and times.

The tariffs for on-street and purpose-built parking facilities tend to be interconnected: generally, the average price for on-street parking is higher than parking in a purpose-built parking facility, with the exception of some prime locations. As a result, when a municipality decides to raise the price of on-street parking, the private purpose-built parking facilities adjust their prices upwards as well.