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UK commercial regeneration property underperforms, data shows

But the total commercial property returns 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 demand for retail warehouses. Residential returns were also comparatively strong, delivering 11.2%.
Jackie Sadek, chief executive of UK Regeneration, 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,’ she added.

Yolande Barnes, head of research at Savills, who announced the Residential results, has identified some far reaching implications for the findings. ‘Residential returns have remained strong in the medium and long term. Over ten 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,’ she said.

But she said there is an emerging North-South divide in residential regeneration, and a need for new business models in a changed financial environment. She added 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. But the difficulty lies in creating new business and investment models to enable enhanced value to be captured,’ she explained.

‘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,’ added Barnes.

The IPD Regeneration Index achieved a total return of 13.2% year on year in 2010, which was a disappointing return when compared to the IPD UK Annual Index total return of 15.1% year on year, according to Greg Mansell, IPD research manager. ‘Perhaps it is not a surprise considering investor’s lack of appetite for assets outside of the prime markets during this period. 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,’ he explained.

‘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,’ he added.

The indices show that sector level performance 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. Retail warehouses in regeneration areas outperformed the UK average, with strong investor demand for the segment driving investors away from prime locations, to look at the alternative assets available,’ said Mansell.