IPD: Regeneration index highlights potential for income generating, mixed use development funds (UK)

Commercial regeneration property underperformed the UK all property average in 2010 for the sixth consecutive year, delivering total returns of 13.2%.

The total returns for commercial property still show a strong improvement on the -0.6% recorded in 2009, and masked a strong performance in the retail sector, partly driven by the sharp increase in investor demand for retail warehouses. Residential returns were also comparatively strong, delivering 11.2%.

The IPD Regeneration and the Savills Residential Regeneration Indices, launched at The German Gymnasium, part of Argent's King's Cross redevelopment project, was chaired by Jackie Sadek, Chief Executive of UK Regeneration, who stressed the need for mixed use regeneration projects in the future.

"In the light of government funding cuts and the reduction in regeneration institutions, there are challenges ahead, but, as these results show, there are opportunities too. It's encouraging to see property establishments making use of the mixed-use schemes, and the government has decided to make no distinction between residential and commercial property, which should be encouraging for the mixed REITs."

Yolande Barnes, Head of Research at Savills, who announced the Residential results and identified some far reaching implications for the findings, said: "Residential returns have remained strong in the medium and long term. Over 10 years regeneration areas have delivered capital growth of 8.8%, over and above the counties in which they are located, at 8.4%. Regeneration areas also enjoy higher yields, currently around 4.3%, compared to the 3.7% in the counties in which they sit.

"Emphasizing an emerging North-South divide in residential regeneration, and the need for new business models in a changed financial environment, she went on to say that there were both challenges and opportunities to arise out of the current prognosis, not least with regard to the development of bulk land in a valuable and meaningful way.

"There is probably unprecedented land value uplift potential for those who get the combination of social, environmental and economic sustainability right and succeed in making good new places," she stated. "But the difficulty lies in creating new business and investment models to enable enhanced value to be captured".

"For schemes to progress, innovation will be needed to kick start regeneration projects without the use of public funding to deliver over the longer term. It is possible that commercial property development will only be viable in some areas on the back of residential schemes used as the key to unlock funding and investment for mixed and commercial uses."

Greg Mansell, IPD Research Manager, presenting the results for commercial regeneration property, said "The IPD Regeneration Index achieved a total return of 13.2% y/y in 2010. This is a disappointing return when compared to the IPD UK Annual Index total return of 15.1% y/y but it is not a surprise considering investor's lack of appetite for assets outside the prime markets. However, when we look beyond this headline number we see that strong performance was achieved by the low-yielding high-quality stock within regeneration areas, showing outperformance was possible without exposure to Central London in 2010.

"2011 has seen yield impact lose momentum as a main driver of investment performance, raising the importance of income returns. This plays to the strengths of regeneration areas, which have provided investors with above-average income returns for the last six years. With the focus back on income, those investing in regeneration schemes need to carefully consider the needs of future occupiers to ensure their scheme provides the most viable blend of uses."

Sector level performance
Sector performance was varied. Offices suffered a torrid year, seeing negative capital value movements, of -0.3%, while industrials similarly lagged behind their commercial counterparts, recording only 0.6% capital growth.

"Retail performance provided the main highlight," Mans

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