ASIAVIEW: Signs of an alternative universe

Whisper it softly, but alternative real estate in Asia finally is gaining traction. Remarkably, that traction is beginning with car parks in China. 

“Everyone is talking about car parks,” one bemused property agent told PERE last month. Shortly thereafter, China Resources Capital, the financial services arm of China state-owned conglomerate China Resources, and Algemene Pensioen Groep (APG), the Dutch pension fund administrator, announced they had committed $120 million each to a club fund with the sole purpose of developing and buying car parks in city centre locations across Tier I and Tier II cities in China.

The vehicle has the hallmarks of a meaningful private real estate investment proposition. Macquarie Capital, the investment advisory platform of Australia’s Macquarie Group, is brokering, structuring and investing in it, while Wilson Parking, a big manager and operator of car parks in Asia, is taking day-to-day management responsibility for its assets (as well as investing). 

Scratch a little deeper, however, and the vehicle gives rise to a few questions. The announcement by the two large investors mentions that they will have access to seed investments of China Resources Group. Given the niche property type has few performance benchmarks to use as a guide, won’t investors need to place a lot of trust in the valuations being assigned to the transferred assets? 

Next, there is planning risk. Investors should take comfort in investing alongside a state-owned enterprise like China Resources. Nevertheless, as PERE understands it, few permits are granted by local governments for developments solely for parking use. Like with China’s logistics market, which unbelievably is no larger than that of the Netherlands or greater Boston, car parks often are regarded as a waste of potentially higher-yielding and more attractive real estate development space. 

Existing parking is widely considered auxiliary to other real estate and generally not built on a standalone basis. Thus, can enough cases be made for buying properties with a view to inheriting and separating out the parking component? Perhaps it can, but each outlay would then need concurrent strategies.

Further, are the Chinese people (the end-user or occupier equivalent) ready to pay for car parking? Unlike in many Western urban centers, the attitude today is that parking is free other than for certain high-end offices, luxury malls or airports.

No doubt China Resources, APG and Macquarie have asked themselves these questions. Evidently, they’ve determined that mindsets will and are changing, at least sufficiently enough for a few hundred million dollars to make a meaningful enough impact in the space and generate returns of 15 percent-plus. In addition, PERE understands that another one or two investors could join the vehicle shortly.

As China continues to develop its urban infrastructure at breakneck speed, little emphasis has been placed on addressing its rapid car production and ownership. According to a report in the Financial Times in January, 2013 will see China produce more cars than Europe for the first time in history. The newspaper reported 19.6 million cars and other light vehicles are incoming versus 18.3 million in Europe (in 2012, China produced 17.8 million and Europe produced 18.9 million). It is worth noting that Europe’s projections include Russia and Turkey.

China has five times fewer parking bays per car than the Western world, and car ownership is growing at a rate of more than 1.1 million new car sales per month, according to LimeTree Capital, another firm hoping to raise capital for the sector. Indeed, the Hong Kong-based firm appointed placement agent Mercury Advisors late last year to help it raise $325 million for its China Car Parks Investment Fund, according to SEC filings.

Notionally speaking, the ‘fundamentals’ for car parking look attractive. Similar to logistics, capital expenditure post-purchase is minimal and, when well populated, car parks should generate significant cash flow and, therefore, yield.

Naturally, investing alongside the right partners is essential. Wilson Parking, for example, has more than 45 years experience managing and operating car parks in Australia, New Zealand, Singapore, Korea, Hong Kong and Macau. The company, with 300 car parks comprising more than 100,000 bays, already has broken into mainland China as well.

Half-joking, Jeffrey Schwartz, the co-founder of logistics giant Global Logistic Properties, suggested on a recent call that the property type outside of logistics that interested him most was car parking. “People have tried, but it’s hard to accumulate critical mass,” he said. That concern still may be true, but ‘people’ are trying again regardless.

Of course, when placed in context with more traditional property types in Asia, car parks and other alternative assets still are a blip on the radar of most investors and managers alike. In its Investment Intentions Asia Pacific Survey 2013, the Asian Association for Investors in Non-Listed Real Estate reported that, of the preferred sectors in Asia-Pacific, less than 20 percent of the 56 fund managers and 12 fund of funds managers polled preferred to invest in ‘other’ property types (versus retail, offices, residential and logistics). Of the 42 investors polled, zero preferred to invest in ‘other’ real estate.

Last month saw early signs that alternative real estate investing in Asia has gained traction. Tangible success in the aforementioned vehicles will no doubt see these signs become more visible still.