IPD index reveals regeneration risks and rewards

Property in regeneration areas is still 'a solid option for investors looking for long term returns' but is more vulnerable to market downturns. This was the conclusion drawn by research organisation Investment Property Databank (IPD) at the launch of its latest IPD Regeneration Index in London this week.

The Regeneration All Property total return - which combines growth in rental and capital values - fell to -6% in 2007, compared with IPD's broader UK All Property Index which slipped back only to -3.4% over the same 12-month period. However, this year IPD added the investment performance of developments in regeneration areas to the index. This provided the good news that developments in regeneration areas returned 1.2% in 2007, significantly outperforming the IPD UK All Property Index.

IPD says that over the medium and longer terms, total returns from regeneration areas are identical to the broader UK as a whole and have both shown an average annual total return of 11% over the last 27 years, diverging to 11.4% total returns for the IPD All Property Index and 11.3% on the Regeneration Index over the last 10 years. It was only in the last three years that regeneration properties under-performed -- 8.8% compared to 10.8% for All Property.

IPD research analyst Rebecca Graham commented: 'Total returns fell more than average in 2007, they also peaked earlier in 2005 showing the vulnerability of assets.' She said that there is greater variability in the returns from regeneration property and therefore higher levels of risk. 'But by investing at the right time you can reap rewards.'

Different sectors within regeneration areas have performed differently, however. Office total returns for office property in regeneration areas have consistently exceeded the IPD UK average over the last five and 10 years.

In 2007, industrial properties in regeneration areas under performed slightly, investors earned -4.4% compared with the - 3.5% UK average. However, historically, industrial properties in regeneration areas have provided strong returns and are less risky than other sectors.

Meanwhile, retail warehouses and shopping centres in regeneration areas underperformed the retail warehouse and shopping centre UK averages, returning -7.5% and -4.7% respectively.

The Summer 2008 IPD Regeneration Index looked at a sample of 659 properties (an increase of 78 on the previous year). The properties had a value of £8.13bn (EUR 10.24 bn) and were spread throughout 37 regeneration areas in England - excluding Scotland, Wales and the rest of the UK. The index examines areas where there are regeneration programmes and those where the government has established urban regeneration companies.

Rebecca Graham explained that IPD would not rule out extending the index into mainland Europe if regeneration areas can be identified. While government schemes highlight regeneration areas in the UK there is nothing comparable on the continent according to Graham. 'There's nothing stopping us except knowing where these areas are,' she said.