Investing in car spaces? Park that idea
When the NSW Government announced some apartments will no longer be required to have car spaces, real estate agents predicted rising prices for existing spots. They overlooked one nasty little cost for investors.
Every time a state government or local council announces a reduction in the number of car spaces required for apartment construction, there’s a flurry of excitement about the value of existing parking spaces. At a cost of less than $50,000 a space, surely this is a great way to enter the property market with no tenants to trash the joint. It’s just a block of concrete, how difficult can it be?
A week ago, the NSW Government released a draft change in planning laws allowing apartments within 400 metres of a transport hub to be built without parking spaces. Cue the articles on the rising competition for spaces. The Australian Financial Review (AFR) ran the headline, “Supply shortages fuelled by new planning laws means capital gains and attractive yields” (27 September 2014, page 29).
Don’t forget the Parking Space Levy
Not one mention of a minor inconvenience: the Parking Space Levy. It’s a damn annoyance for anyone selling a parking space so why bother with it? Well, simply because it applies to all investments in off-street car spaces in a ‘leviable district’. The levy is a whopping $2,260 (indexed to CPI) in the City of Sydney, North Sydney and Milsons Point. It’s a more manageable $800 (also indexed) in Bondi Junction, Chatswood, Parramatta and St. Leonards. Click on any of these locations to see the relevant map, and it’s surprising how far the areas extend. Sydney includes Pyrmont, Ultimo, Walsh Bay and parts of Chippendale and Surry Hills. There is an exemption if it is not an investment, that is, if the owners live in the same building or an adjoining one.
Owners of individual car park spaces, such as the significant recent release near Sydney Airport, may heave a sigh of relief that they are not currently caught in a leviable area. But every state government is looking for new revenue sources. For example, a few months ago in May 2014, the Congestion Levy Act 2005 for Melbourne expanded the levy boundary, and all off-street parking in the expansion area will be leviable at $950 a year from 1 January 2015 (also indexed to CPI).
The AFR even quoted some healthy return numbers. Be still my beating heart. The owner of a parking space in Surry Hills can ask $80 a week. If the parking space cost $50,000, the yield would be 8.3%. Back up the truck, how many of these can I buy?
There are three costs this calculation ignores, and the Parking Space Levy is the highest. There are also council rates and strata fees. Yes, although nobody has to collect the garbage for a 15 square metre block of concrete, there are still roads and council offices to pay for.
Out of the 52 weeks at $80 a week income ($4,160, let’s ignore any agent’s fees or vacancy rates, it’s bad enough without a complete reality check) comes $2,260 of Parking Space Levy. A typical City of Sydney council rate for a car space is $650 a year (including stormwater charge) while strata fees are about $920 a year. Those three costs total $3,830, leaving $330 return on the $50,000 investment, or 0.7% pa. That’s without paying any borrowing costs.
What capital gain?
Of course (said the agent), there’s always the capital gain. When the City of Sydney announced an increase in the Parking Space Levy from $950 to $2,000 in 2009, the value of parking spaces in some suburbs dropped 25%. The levy started in 1992 at $200, and the suburbs were extended beyond major CBDs in 2000.
With governments of all colours desperate for income, does anybody expect any of these levies or levy boundaries to shrink? No, they will rise each year.
Like every real estate investment, the gross yields quoted by agents are only part of the picture, and when it comes to Sydney car spaces, the Levy is a cost you can’t park to one side.
This article is general information only and is not a substitute for professional personal advice.
(Graham Hand presented at this week’s SMSF Owners’ Alliance Technical Workshop, giving his insights on SMSF portfolio construction. If you are interested to learn more about SMSFOA and receive regular updates you can become a Registered Supporter for free at www.smsfoa.org.au.)
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