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Why car parks are just the ticket By: Mark Sherwood, Vail Williams

Mark Sherwood, Vail Williams

Nestling between glass and steel office blocks or standing anonymously on the edge of town, car parks generally lack the instant commercial sparkle enjoyed by other properties to tempt potential investors.

Unfortunately, it means car parks can mistakenly be branded as tertiary investment – along with the low quality office, industrial and retail units languishing at the lower end of the market when judged by quality, rent, location, risk and their ability to attract tenants.

But it’s not a reputation they deserve and it’s easy to bust the myth. Simply by looking at the number of car parks for sale – there are very few – reveals how highly prized they are for their reliable returns, rising value, low maintenance and relative lack of complications.

So why are they still sometimes ranked as investments equal to the old buildings, pubs, hotels and leisure properties that can also be found in the (admittedly ill-defined) tertiary market?

The badly informed perception stems in part from out-of-date attitudes about the old-style wasteground car parks. But sometimes it is simply a lack of imagination about seeing the rewards of what isn’t an everyday opportunity.

The appearance of car parks – whether gravel, tarmac or multi-storey – can range from the dull to the downright ugly which, when compared to impressive office blocks, doesn’t inspire hopes of heavy returns.

Some locations can be off-putting too, but these superficial concerns ignore the demand for the service. They provide an essential facility to drivers who are willing to pay premiums as town and city centre parking growth stalls while car use accelerates year by year.

The saying goes that land is a good investment because “they’re not making any more of it”. The same can be said for car parks – they have a scarcity value because new ones are rare as most local authorities now discourage people from driving into town.

Yet commuters still prefer to take their car and, when planning authorities are also dramatically reducing parking space in new-build offices, it’s hard to see a sudden drop-off in demand. It shouldn’t be forgotten that car park values have mostly weathered the UK’s two recent recessions.

The beauty of car parks – on the balance sheet if not at ground level – is that this demand is relatively simple to capture. There are plenty of large, reputable operators, such as NCP, who can offer straightforward covenants and either pay rent or a share of the profits.

To maximise returns, a profit-sharing deal is probably a better option than choosing a more predictable ground rent agreement. Although it also carries more risk, the need for parking is so high that over the year bigger gains can be confidently expected.

However, watch out for leasehold arrangements where the freehold may be owned by a local authority. The council might demand a cap on how much drivers can be charged to park – limiting the potential returns.

Another consideration is that a guaranteed rent, in comparison to profit-sharing, makes banks look more kindly on leveraging greater debt against car parks, such is their reliability.

Finally, drivers very quickly work out which car parks are patrolled the least so any operator must be trusted to pay attention. Avoid PR trouble too by sticking to the most reputable companies.

But well managed car parks don’t just offer a steady, reliable stream of income and access to lending. With their often prime central locations they also hold the prospect of rich development opportunities – if planning is allowed – combined with the capacity for a fast sale.

For buyers with this is in mind, the traditional tarmacked outdoor space is more advisable as they are simpler to gain permission for than multi-storey operations, which might be an essential part of other buildings such as shopping centres.

However, buying a car park with future development in mind demands a willingness to invest for the long term - a place where people are happy to leave their car does not always lend itself perfectly to new offices or shops.

For example, it may be that an owner will have to wait for commercial activity to move across boundaries, such as a busy main road, before its sale price or the number of potential tenants makes development viable.

But whatever a car park is held for, whether it be income, investment or future development opportunities, the days of being classed as tertiary land should be long gone.

Example 1: Friarsgate car park, Winchester,-1.310484&spn=0.004032,0.007757&hq=friarsgate+car+park&hnear=Winchester,+Hampshire,+United+Kingdom&t=h&z=17
A short walk from the High Street and accessed from the city’s ringroad via Friarsgate, this central location close to Winchester’s shopping is perfect for a steady income. It’s a prime candidate for future development as it’s not a multi-storey and is set alongside plenty of commercial activity.

Example 2: Bedford Road car park, Guildford,-0.577061&spn=0.004017,0.007757&hq=car+park+station+uk&hnear=Guildford,+Surrey,+United+Kingdom&t=h&fll=51.235173,-0.577576&fspn=0.004017,0.007757&z=17
The combination of being close to Guildford train station, the town centre, and the shops and bars created by a recent redevelopment of the surrounding area guarantees a good return. The same qualities make it another perfect opportunity for development, again without the complications of being a multi-storey, for this reason the car park forms an essential part of a major regeneration project that is in the process of being finalised.

Example 3: Grosvenor Square North car park, Southampton,-1.407457&spn=0.002023,0.003878&sll=51.238559,-0.582833&sspn=0.004017,0.007757&t=h&hnear=Southampton,+United+Kingdom&z=18
Office buildings abound in this area of the city and provide a reliable stream of paying commuters during the week, and shoppers at weekends happy to walk the 10 minutes into the city centre. It’s not a multi-storey but is next to one, making it another promising investment for future redevelopment.

About the author

Mark Sherwood is head of Vail Williams’ investment team. He buys and sells standing investments nationwide, advising on development funding and pre sales while also providing strategic portfolio advice. He advises a wide range of clients including many of the major funds and property companies, and is also retained by a number of overseas investors and UK-based high net worth investors. In addition to his investment role, Mark also provides valuations in relation to portfolios and individual assets and development advice.

Features May 2013

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