Interview with a Genie
ParkScience: Hi Genie how is it going?
Genie: Not bad, have been couped up in this bottle since 1990, so rested up and ready for work.
ParkScience: Ever get worried you may never get released?
Genie: Never an issue. Just a waiting game for human hubris, greed and poor governance to entrench itself and inflation takes hold once again. Has not failed so far.
ParkScience: I thought you may have had a cameo during the GFC in 2008?
Genie: Never got off the day bed. A few tyre kickers, but nothing serious. Have recently re started my gym and yoga regime. Ready for an extended session outdoors. Do not want to do a hammy and get put back in the bottle.
ParkScience: Talk soon.
Over the past two years ParkScience has provided a view on where the industry is headed in a post COVID Australia. In particular the scenarios provided in Half Time at The Football and Crisis? What Crisis have been close to the mark - with one exception.
The one area we underestimated was the recovery in night and weekend parking, as a hungry (and thirsty) population embraced being allowed out of their houses and enjoyed the myriad pubs, clubs, restaurants, and events on offer.
This sector has actually performed better than pre COVID trading. For example, through the week of 18-24 July foot traffic through Southbank and Lygon St was above pre COVID levels and Sydney’s VIVID attracted record crowds (and resultant street shutdowns) in June.
On the other hand WFH is now an entrenched right. Office occupancies at 38% in Melbourne, 52% in Sydney and 53% in Brisbane are a real problem. And this is an average for the week - with Monday and Friday occupancies well down on these numbers. As a consequence, the reduction in weekday revenues has been far greater than the increase in weekend revenues.
All of this is about to change again, as the inflationary genie has been let out of the bottle and we are starting to see the impact of inflation and interest rate rises on consumers and the economy.
The vast majority of our workforce has only seen almost uninterrupted growth and declining interest rates for 30 years and is not prepared or can comprehend what lies ahead.
The last serious recession Australia saw was from 1991 as interest rates rose to 17% for home mortgages as inflation hit 18%.
As Paul Keating famously said – it was “the recession Australia had to have”.
This time it is different, caused by a large rise in the money supply across the world, created by Government. In Australia the economy is not overheating with excessive wage growth, however the end results will be similar for the parking industry.
A significant reason for inflation taking off is Governments aversion to implement structural changes that promote more efficient economies, relying on QE or Modern Monetary Theory by printing money- which has inflated asset prices and more recently monetised COVID relief. Australia and the world is awash with debt at historically low interest rates. The Ukraine war appears to have been the turning point as food and energy prices pulse through the world.
Inflation in the USA is running close to 10%, Europe and the UK 8% and Australia at 6%. The reality for Australia is “real” inflation is a lot higher as the basket of goods and services excludes existing dwellings, the cost of land, and mortgage interest charges.
All are still on the rise and every Central Banker (including the RBA) has not seen this coming. Chasing inflation is like catch up footy – if your team is down by 40 points at quarter time you had better kick 10 goals in the second quarter otherwise it will be a blow out. To ParkScience it looks like we are 5 minutes into the second quarter and have just kicked a few behinds.
The Westpac Consumer Confidence indicator is down 20% since November 2021 and is at similar levels to the 2020 COVID lockdowns and the GFC in 2008.
Enough macroeconomics. Time to look at what will be the impacts on carpark customers, operators, and owners. To do this we will draw on what occurred in the early 1990’s as interest rates rose and consumers were faced with some confronting choices. And remember it is not where interest rates end up (and it will not be 18%) but their increase relative to their normalised rate.
Basic mathematics implies a doubling of home-loan interest rates will halve the sum a household can borrow for a given monthly interest repayment. When households hoping to borrow $1m suddenly find they can afford only around $500,000, the impact on asset prices and consumer confidence will be substantial. And the single biggest asset (and debt) for Australians is their house.
Unlike the USA where 30 year fixed mortgages are common, and owners can hand back the keys with little impact on their future credit, Australians are either on variable rates or 2-3 year fixed terms and will have a bad credit rating that will have a significant impact on their ability to gain further credit.
Consumers have a choice as to where they will allocate their earnings, and this hierarchy is as follows:
- Home mortgages
- Education, especially private schooling
- Clothing & footwear
Parking is a discretionary expense, and unfortunately at the bottom of the list. Parkers will focus on every other outlay as a higher priority. With public transport being very cheap compared to the use of private and corporate vehicles, combined with the very short term contractual nature of most customer parking agreements (read daily or monthly) revenues will decrease.
You will soon see (if not already happening) cancellation of monthly parking agreements, a continued shift to all day parking products and reduction in the high yielding weekday hourly casual parkers. Night and weekend volumes will reverse their recent gains.
The declines will not be uniform. Secondary markets will be the most volatile - Chatswood, Docklands and West Perth for example.
Once parkers of all categories (commuters, shoppers, entertainment) find a cheaper alternative than driving to their destination, it will take time (and usually extended promotions based on discounts) to get them back.
For car park owners it will be a double hit, with bond yields on the rise which will directly impact capitalisation rates and valuations.
For operators, sustained growth, and profitability hinges on investment in technology from integrated end to end systems that start with the consumer. Only those with deep pockets and over the horizon outlooks will survive. There is a lot going on behind the scenes with the major players and the 2022-23 year will be a watershed.