Heads you win
Regular readers of the newsletter will be familiar with ParkScience views on how COVID has fundamentally changed the commercial parking business in Australia. These were set out in Crisis? What Crisis. No V shaped recovery for parking and COVID-19 and Parking, which have proven to be very close to what has occured.
Within every marketplace there are contrary positions and views, and we are seeing one of these in Sydney with Wingate, a substantial private investment and finance corporation contracting to purchase the 589 bay Quay West carpark from Mirvac in Sydney’s Rocks precinct, which is adjacent to Circular Quay.
Total acquisition costs are $55.79 million on an initial yield of 4.9% for a leasehold strata lot that has 67 years remaining. It is leased to Wilson Parking for a gross rent of $3.3m with two small retail tenancies totalling 598m2 under separate lease.
In the background, the largest owner of commercial carparks in Australia, DEXUS, has been steadily divesting itself of older commercial buildings (with substantial parking attached) and pivoting to premium towers that have far lower ratios of parking bays to office space. This commenced in 2018 with the sale of Southgate Tower in Melbourne (876 bays), and has continued with 383 Kent St (780 bays),309 Kent St (137 bays), 201 Miller St (120 bays), Grosvenor Place (561 bays) and 12 Creek St (124 bays). It has also commenced a $2.1bn twin tower development at Waterfront in Brisbane with Deloitte to move from the adjacent 36-year-old Riverside Centre tower, that has 530 bays. DEXUS has been an industry leader in positioning itself ahead of two significant shifts that we are now seeing in commercial property – a move towards premium office towers and the end of an almost 30 year one way bet on parking revenues and rents.
Parking revenues had platued even before COVID struck, and its impact has seen them decline up to 35%, depending on location and size. Their recovery is going to be patchy, protracted and uncertain. Does anyone know if there will be another COVID variant and how infectious it will be? How will inflation impact Australia, in particular mortgages and household discretionary (parking) income? Will capitalisation rates hold steady in an inflationary environment?
The impact of the hybrid working model is a 3-day peak parking period, with Monday and Friday seeing substantially lower volumes and the high yielding hourly casuals on a continued decline due to high hourly rates, ZOOM and relatively cheap Uber services. There is an uneasy détente between owners and operators over leases that have expired and moved to holdover rents that are well below the previous levels. ParkScience is unaware of any major carpark lease that has been entered into through a renewal or tender process, that is not lower than the pre COVID passing rent. And lower rents are only part of the problem – the other contentious point is clauses that provide some protection from COVID style events.
At Quay West, Wingate is looking to achieve a substantial reversion in the carparks rent, which is subject to an open market review effective September 2024. This is based on the impact of premium office developments in the immediate area, including Salesforce Tower (50,000m2 office and 86 bays) that will open in late 2022.
The investment offers quarterly distributions commencing at 6.5% and projected to increase to 7.0% by 2026. With a 4.9% initial yield, the carpark rent will need to increase from $3.3m to around $4.7m.
The last rent review was effective September 2019 and was subject to a determination, which saw the rent decrease by approximately $250,000. This was prior to COVID and the severe impact it has had (and continues to have) on parking revenues and occupancies on commercial and retail carparks across Australia - and Quay West has not been immune to this.
So we are seeing two diametrically opposed views on how carpark revenues will move in the medium term. If you see substantial revenue and rental growth in a well-located Sydney carpark, then the Wingate vehicle offers an opportunity to capitalise on it. The contrary position is held by DEXUS.
Heads you win…