A record price of US$665,000 was reportedly paid for a single parking space in Upton residential complex car park, in Connaught Road West, Sai Ying Pun, near the CBD, on Hong Kong Island in April. Have prices gone crazy or the exuberance is rational?
With property prices already at eye-watering levels, an increasing number of investors have started to turn their interest towards individual car parking spaces where key demand drivers have been growing at a rapid rate — motorcycles and private car registrations have grown at a CAGR of 4.1 per cent since 2011.
The rush into the asset class has seen the average price of parking spaces in residential developments surge by 30% through the first eight months of this year.
But are parking spaces really a good investment?
Firstly, let us define what we mean by ‘good’. In my books, this should be an investment that both rises in value over time and enjoys positive carry — where the monthly incoming cash flow is greater than loan repayments and other costs associated with holding the property.
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At present, the amount you can borrow from a bank to invest in a parking space in Hong Kong is capped at 40% of the property value. With parking spaces currently transacting at an average of about HKD1.8 million (USD230,640), an investor borrowing the maximum amount allowed would be subject to loan repayments of HKD5,147 per month (USD660 per month), assuming an annual interest rate of 3.5% and loan tenure of 15 years.
If we set the loan repayment amount being equal to rental income, this would imply that the investment needs to achieve a NOI yield of 3.4% to be in a state of positive carry. Yet, most parking spaces are currently transacting at NOI yields of 2.5% or lower, implying that an investor in the aforementioned situation would be on the hook to contribute a further HKD 1,397 (USD179) per month just to meet the monthly loan repayments. This shortfall increases further once management fees (usually about 10% of monthly rental income) and property taxes are considered.
The spread between the incoming and outgoing cash flows could be narrowed by taking a longer loan tenure or securing a more competitive borrowing rate, but the amount of leeway banks will provide is very much dependent on the individual borrower.
So, do car parking spaces make for a good investment? In terms of achieving positive carry, the answer appears to be no. But then again, given the well-documented supply demand imbalances in the market, prices still look well supported with room for growth. As such, they may still appeal to those with deep pockets.
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