Why a car space in the right spot can be a good investment
Where can you buy a real estate investment for just $30,000 in Melbourne and $45,000 in Sydney? Secure, undercover car spaces in Australia's two major cities can be found for these sorts of prices on the website, findacarpark.com.au.
So car parks are affordable for those wanting to get on the first rung of the property investing ladder, but do they stack up as good investments?
As with most real estate, it all comes down to location. But with car spaces it's not just the city and street address that determine the price and demand. It's also about accessibility, with drivers looking to get in out as quickly as possible. So proximity to the ground floor and to the lift and stairs also needs to be taken into account.
Buy a car park where there is strong demand, such as in the CBD or near major transport hubs, and you can secure yourself a good rental return, certainly higher than you get from term deposits and many other real estate investments. Some analysts quote returns as high as 10%. The trade-offs are limited capital growth and almost no opportunity to improve the asset.
The Melbourne car park referred to above is in Franklin Street, close to the Queen Victoria Market and RMIT. It is leased to an operator and returns about 6.4%. The Sydney example is in Pyrmont on the fringe of the CBD and close to Darling Harbour and the light rail. It is leased to an operator and returns 6.8% after outgoings. One stumbling block for would-be car park investors is a lack of spaces to buy, particularly in CBDs. A study by Colliers International - Australian CBD Car Parking - The Next Decade - found few new non-residential car parks were being built in CBDs, certainly not enough to keep up with demand.
Of course, many CBD residential buildings incorporate car spaces and increasingly developers are allocating car spaces with separate titles so they can be sold separately from apartments. Some owners who have bought apartments with car spaces lease them out, often through an operator, to make extra cash.
Some apartment owners might be able to sell their car spaces, but there may be restrictions, such as only being able to sell to others in the building. This can be very lucrative, particularly in Sydney, where residential car spaces have sold for more than $200,000. Melbourne car park spaces can also be priced up to $100,000 due to population growth and the city council's discouragement of long-term parking.
Benefits of car space investing include little maintenance or upgrading costs and minimal management, particularly if leased to an operator. Fees can include strata levies and council rates.
The fact that they can be a completely hands-off investment makes them attractive to offshore and interstate investors.
Financing a car space purchase can be more tricky than a more conventional real estate investment. Given the low entry costs, some buyers pay cash but others, including self-managed super funds, want to borrow part of the cost, especially at the moment when the interest rate on borrowings is likely to be lower than the return achieved on the investment.
Some credit providers deem car spaces as specialised property carrying more risk and so may limit the maximum that can be borrowed against them to around 50%. They may also set a maximum term of around 10 years for the loan or charge a higher interest rate.
Hot spot - Gladstone
Gladstone, 550km north of Brisbane, is one of Australia's major industrial cities with over $80 billion of new resource and infrastructure projects planned, including four LNG projects, a port expansion and new rail links. Rents and prices rose strongly over 2011 and 2012 but, in the year to February 2013, rental vacancies have risen from 1% to 4.3%, according to SQM Research. The researcher also found prices and rentals fell back over the year, with average house prices dipping 5% to $500,173 and rents falling 8% to $617 a week. Unit prices dropped 7% to $418,500 and rentals eased 1% to $555.
But with the population expected to grow over the next five years as new projects are completed, the upward trend in prices and rentals is expected to resume.