The power of Self Managed Superannuation Funds (“SMSF”) has become more publicised of late, the Reserve Bank of Australia even attributing SMSF’s for a possible ‘property bubble’, after all, SMSFs are a $530 billion dollar industry- that’s a fair chunk of money.
Recently, SMSFs have quietly influenced sales in another sector of the property market – car parks.
Car parks are seen as a small investment with no leverage, that can assist an SMSF investor in placing a small parcel of their savings while achieving positive cash flow. Car parks are seen as a perfect “low risk” investment to match the risk appetite of an investor who would like to diversify their SMSF investment portfolio without leverage.
Why carparks are a good investment
A typical car park can be viewed as a 12 square metre slab of concrete with no maintenance required – after all its concrete. This can be compared to a SMSF Property such as a residential weatherboard residence which required significant maintenance and property management. With car parks, most likely, you will not need to borrow to invest, and can use a small portion of your superannuation balance to cover the purchase price.
Many SMSF investors may be scratching their heads thinking that we have cash sitting in an account looking for a better return. Car parks can be seen as a cash flow positive investment that can achieve a net yield of up to 7%. This can be compared to a term deposits where returns vary between 2-4.5% as a result of the low interest rates, which are here to stay for at least the next 12 months.
The drawbacks of carpark and SMSFs
The recipe for success in SMSF Property includes a mix of yield and capital growth. There is no doubt that the ‘right’ SMSF investment in car parks will achieve a yield in excess of a SMSF term deposit, however will a car park provide capital growth in the long term? Past performance shows that inner city car parks have shown capital growth due to limited spaces particularly in office buildings.
For Example – Syney Airport car spaces…..
The much publicised freehold strata car park near Sydney Airport offered car parks for approximately $57,000 and a yield of 6.5% over a 5 year lease. Many of these car parks were snapped up in days of being released by SMSF investors that viewed a car park as a perfect entry into Sydney’s property market. This provides an effective yield however there is no evidence to suggest that the 12 square metre piece of concrete will increase in value during the same period.
The Sydney car park example, does offer a fixed 5 year lease without the hefty CBD parking levies of up to $3000, however what about the unknowns to impact the future value of the investment.
In 5 years, you may be faced with vacancy issues as a result of the building of a second airport in Sydney’s west. Further, there may be changes in public transport, where the government may offer subsidies to passengers travelling to the airport by public transport, reducing the need for car travel. A similar scenario existed in Melbourne where Zone 3 was abolished, increasing the flow of train passengers immediately. Finally, with so many investors moving to the perceived safety of carparks, more carparks may be built in the area providing a risk of oversupply and impact future vacancy rates.
Inner city or Suburban car parks?
The recipe for success will depend on whether your car park is positive cash flow with a long term tenant. Suburban car parks will not be faced by the large annual levies and will be subject to ongoings such as rates. Whereas, inner city may have levies, however, may produce a higher return with less vacancy rates. With any long term investment, its about location, and choosing the right investment requires significant due diligence.
For any car park investor, it is important to consider whether the car park will be positive geared, that is will your rent cover your expenses such as rates and government charges. With a focus on yield, its important to understand the prospect of income growth in the future and vacancy rates, if your car park is not on a fixed lease.
If you have a question in regards to setting up a SMSF or investing in car parks, please give Redwood Advisory a call on 1300 790 110.
The author, Ivan Filipovic is a Director of Redwood Advisory- SMSF Specialists.
The content has been prepared without taking account of the objectives, financial situation or needs of a particular individual and does not constitute financial product advice.