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Parking Lot Arbitrage: The Latest Trend in Indian Real Estate

May 21, 2013

With the real estate sector slowing down after the 2008 boom, investors in the sector are trying new and innovative ways to invest in the sector. Real estate investors in India have come up with a unique strategy known as the “Parking Lot Arbitrage.”

Due to the population explosion, the average per capita land has decreased significantly. And with the urbanization and increase in the disposable income, the number of cars in every household has gone over the number of members in the house. Real estate firms are capitalizing on the situation by constructing large parking lots and selling parking slots at high prices.

With cars costing as much as $18000, buying a $1500-$2000 parking space has become a necessity rather than a luxury. The parking lot investment is like going long a commodity with only convenience yield. But with the land crunch, the availability of the space for building such parking lots has also decreased at a rapid pace and the ones already built are being sold at a premium.

There are three types of investors benefiting from the innovative parking lots: real estate firms, purposeful investors and opportunistic investors.

Real Estate Firms: Call Option on Development

The construction of parking lots requires little investment as it requires only the concrete wall structures and a boundary wall. This results in a “Deep-In-Money” call option. Real Estate firms are the biggest gainers as it requires less investment in terms of money and time than a commercial real estate development such as office or apartment.

The few facts that make a land ideal for conversion to parking lot are:

  1. Proximity to residential areas
  2. Surrounded by high-end localities
  3. No Parking lot in at least a 5km radius
  4. Access to the land via wide and well maintained roads.

With more and more parking lot slots being sold above the market price, Real estate firms are investing and capitalizing on the market scenario.

Purposeful Investors : Long a commodity with convenience yield

These are those investors who need the parking lots for their very purpose. With a permanent parking slot investment, the investment has a high convenience yield. The chances of decrease in price of parking lot are next to zero and the increase over long term can be significantly high. As a purposeful investor, the focus is on the convenience yield and not on the increase in price.

Opportunistic Investor : Buying a coupon paying bond at a discount

These are the investors who buy the parking lots as investment and later sell them at higher prices. After buying a parking lot from the investment perspective, they lend them to other needful and get a fixed monthly rent from it.

As a bond-type instrument, it provides a fixed amount every month which can be considered equivalent to the bond coupon.

Consider a two-year $10,000 7% coupon-bearing bond, which we acquire at a discounted price of $8,000. We can compare this bond with a parking lot of current market price of $8,000. The rent that we get every month is the coupon and the price at which it is sold later is the actual price of the bond.

The opportunistic style of investing has become very popular lately and has led to a greater demand of the parking lots as investors are looking at it as an attractive investment with near zero downside and unlimited upside. These investors are the real parking lot arbitrageurs.

With the real estate sector not generating huge returns, such strategies are bound to generate interest among the potential investors and would further increase the inflow of the cash in the real estate sector.

Sourabh Jeswani

He is an engineer by profession and real estate enthusiast by heart. He has passed the CAIA Levels I and II exams. With valuable inputs from: Anurag Arora An engineer, CAIA candidate and an avid blogger who likes discussing everything about alternative investments from hedge funds to private equity.