Regeneration properties are still a solid option for investors looking for long term returns, but proved more vulnerable to the recent market downturns according to this year’s IPD Regeneration Index. The Regeneration All Property total return fell to -6.0% in 2007, compared with IPD’s broader UK All Property Index which slid -3.4% over the same 12-month period. This year for the first time the index looked at development performance in regeneration areas. Developments in regeneration areas returned 1.2% in 2007, significantly outperforming the IPD UK All Property Index.
Over the medium and longer term, total returns from regeneration areas are identical to the broader UK as a whole. In fact, the last 27 years have shown average annual total returns of 11.0% in both cases. The last ten years show 11.4% total returns on the IPD All Property Index and 11.3% on the Regeneration Index. Five year returns are 12.2% respectively and it is only in the last 3 years that regeneration properties have under-performed at 8.8%, compared to 10.8% for All Property.
Still, different property sectors in regeneration areas showed different patterns of returns.
Offices managed to retain their attraction in relative terms, returning -0.9% in regeneration areas compared to -0.5% in the broader UK index. Total returns for office property in regeneration areas have consistently exceeded the IPD UK average over the last five and 10 years.
Historically, Industrial properties in regeneration areas have consistently offered investors strong returns and come with a lower degree of risk. However in 2007 industrial properties in regeneration areas slightly underperformed, earning investors -4.4% compared with a -3.5% UK average.
In the Retail sector, retail warehouses and shopping centres in regeneration areas underperformed the retail warehouse and shopping centre UK averages, returning -7.5% and -4.7% respectively.
Yolande Barnes, Research Director at Savills said: "The case for investment in regeneration assets is more compelling if residential property and development activity are included. In fact, the more exciting returns and possibly the more stable income streams have been enjoyed by those willing to diversify away from standard, 'big box' commercial standing property investments and towards residential 'small box', 'neighbourhood commercial' type properties and development activity."
Morley's Hoong Wey Woon, Fund Manager of the Igloo Regeneration Fund, commented: "For the first time development returns have been analysed and show the potential outperformance of regeneration development returns. The results should be of interest to both developers and investors alike. Importantly, the investment returns also show that regeneration investors are well poised to benefit as the property market recovers over the medium term."
Steve Carr, Director of Policy and Economics at English Partnerships, said: “In this difficult market, it will pay to look carefully at property investment opportunities in regeneration areas. The Index clearly shows regeneration properties will eventually outperform when the cycle eventually moves upward. The long term prognosis for regeneration property remains good.”
André Gibbs from Argent said: “Argent is delighted to join English Partnerships and Morley as a sponsor of IPD Regeneration Index. We feel that the Index has already gone a long way to demonstrating to institutional investors that property investments across some of the UK’s most deprived areas can show returns equal to investing in core locations. We hope that the Index can, going forward, embrace an even larger number of properties representing all sectors and can highlight the performance from regeneration development as well as investment".
