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Dwindling Hong Kong car park supply drives investment acceleration

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Dwindling Hong Kong car park supply drives investment acceleration

Parking space prices are skyrocketing in Hong Kong, demonstrating a more rapid climb than the Asian financial hub's famously expensive space-starved housing market, as a single parking spot was recently taken off the market for a record HK$6.0 million.

A sharp decline in car park supply in recent years has been the main factor driving up sale prices and rents, analysts said, but they also cautioned that parking spaces are more vulnerable to economic volatility than other property assets.

A single buyer splashed out HK$6.0 million, or HK$44,444 per square foot, for a parking bay at Sun Hung Kai Properties Ltd.'s Ultima luxury residential project in the Ho Man Tin area in the Kowloon district. The seller, a couple who bought the lot for HK$3.4 million in 2017, took home an astonishing HK$2.6 million profit in less than a year, the South China Morning Post reported June 5.

SNL Image
Sun Hung Kai Properties' Ultima condominium in Ho Man Tin, Hong Kong
Source: S&P Global Market Intelligence

The average transaction price of a parking space in Hong Kong grew to HK$1.7 million in 2017, up 42% from HK$1.2 million in 2016, JLL data shows, far eclipsing the 15% growth in capital values of residential properties over the same period.

"The supply is pretty tight," Dorothy Chow, regional director of valuation at JLL in Hong Kong, told S&P Global Market Intelligence.

Chow said the Hong Kong government has drastically cut the number of allocated parking spaces in both newly built private and subsidized housing estates in recent years. Its original aim was to encourage people to choose public transport, and avoid vehicular crowding and road congestion. But the move appears to have in turn triggered a severe supply-demand imbalance and sky-high parking space prices.

"For high-end projects, occupants usually have a stronger demand for parking spaces," Chow said. "If there is a lack of supply, transaction prices will be magnified."

Hong Kong's total vehicular population expanded by 34.8% between 2006 and 2016 to 745,677 from 552,980, according to government data. During the same period, the total number of parking spaces increased by just 9.5% to 743,000 from 678,000, proportionally insufficient to meet demand growth.

Previously, the ratio of private housing units to parking spaces in Hong Kong stood at about 4:1, Chow said, but that ratio has risen to 7:1, or even 10:1 in some estates.

Additionally, analysts said the demolition of several public parking spaces by the government for redevelopment in the past few years, including the sale of the Murray Road multi-story parking site in the Central district to Henderson Land Development Co. Ltd. in 2017, has further worsened the parking space shortage.

To capitalize on the fundamentals, an increasing number of investors have turned their interest toward Hong Kong's individual parking spaces.

JLL data shows that total big-ticket transactions valued at more than HK$100.0 million in car parks with more than 100 spaces reached HK$644.8 million in 2017, compared to HK$259.6 million in the year-prior period.

The city's car park market has also experienced a significant leap in rents.

Link Real Estate Investment Trust, which owns the largest portfolio of car parks in Hong Kong, has seen its per-lot monthly parking space income jump nearly 60% in the past four years. The company said during its June earnings briefing that it is very positive about future demand for the asset class.

After the close of the Murray Road car park sale in May 2017, the average monthly rent of a parking spot at a nearby office building in Central, Hong Kong's central business district, surged to HK$13,000 from the previous HK$7,000.

However, although a lot of cash is being injected into alternative assets, the price of parking spaces fluctuates greatly and yields could wind up being disappointing, according to analysts.

David Hong, a Hong Kong-based property analyst at China Real Estate Information, said the liquidity of parking spaces is "very low," which means prices can grow faster, but they would also tumble more swiftly.

"A parking space is not a necessity; it would be more sensitive to economic conditions," said JLL's Chow. "When the economy isn't doing well, people may sell their cars and then they won't need a parking lot."

Also, the yield on parking spaces is not as attractive as that of residential properties, according to analysts. JLL estimates the average annual return for parking spaces in Hong Kong to be 2% or below.

Hong added that investors should take into account that current regulations only allow a buyer to borrow a maximum of 40% of the parking space's value from a bank, with car park borrowing costs remaining higher than mortgage rates.