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IPD and Savills' Regeneration Indices Report 2011

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- Total returns from regeneration property improved sharply in 2010, but once again underperformed in comparison to all commercial property.
- At the root of the uptick was improved capital value growth, reflecting the broader recovery in the property market.
- Underperformance in regeneration property is the product of inferior capital growth, rather than poor income returns.
- Residential regeneration property has outperformed its commercial counterpart over both the medium and long term, demonstrating the long term benefits of holding this asset class.
- Office and industrial regeneration property underperformed the ‘All Property’ averages in 2010, but still hold their own over the long term.
- Regeneration retail only marginally underperformed the all property average, with retail warehouses in regeneration areas significantly outperforming their counterparts outside regeneration areas. This was as investors sought out opportunities in secondary areas.
- Regeneration property is being discounted by investors relative to other commercial property but enjoys higher yielding income returns as a consequence, at 6.7% in 2010 versus 6.4% for All Property.
- Evidence to justify this yield differential is mixed. Regeneration rental growth was weaker than other properties this year but stronger last year.
- A pattern of underperformance during a downturn, and outperformance when the wider market begins to perform well is emerging. If previous cycles repeat themselves, the narrowing gap between All Property and regeneration returns in 2010 may be an early indication of eventual outperformance, although the immediate outlook suggests that there will be little change.
- Regeneration faces a series of challenges this year and in the near term. It is less likely to attract investors at a time when the market is focussed on prime property in established locations. Development funding is also scarce due to public funding cuts and restricted debt finance.
- This means that for schemes to progress, innovations will be needed to kick-start regeneration projects and deliver over the longer term. It is possible that, in some locations, commercial property development will only be possible on the back of primarily residential schemes able to attract funding and investment. The impact of commercial property types on these schemes may be quite different to those seen in the last decade as a consequence.
- The past history of this index suggests that investing now will reap rewards over the longer term.

Source : IPD

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Keywords : IPD