Prime Business Parks recovered less in 2010, as regional growth dwindled

The S&P parks, as measured by the IPD/Strutt and Parker Business Parks Index, delivered returns of 9.2% in 2010. The parks, which consist of largely prime property, covering 206 assets across 50 locations in the UK, outperformed urban offices and standard business parks, which recorded 8.2% and 7.8% respectively. 

However, the parks still recorded lower returns than the all offices average (15.8%), mainly due to the influence of Central London on office returns.

Greg Mansell, senior research manager at IPD explained: "S&P parks represent quality assets of scale in good locations and recovered well in 2010, but they are another example of the lack of growth and investment in the regions as investors continue to flock to safety, which is really only London."

The annual report, due to be published shortly, recorded capital growth of 1.4% for S&P parks which was largely driven by improving investor sentiment and whilst this was lower than the all UK office average they offered a considerable premium on income return, of 7.7%.

The long term view suggests that S&P parks have outperformed IPD parks and IPD urban offices since the indices inception in 1987.  Over the years the spread between the S&P parks index and the rest has widened; during the 2007 crash and the 2009 recovery the indices movement was highly synchronised, but S&P parks still delivered higher than their peers.

Andy Martin said: "The parks have a lot to offer in terms of income but active management and incentivisation is needed to secure long term tenants. Lease lengths have already slipped to just under six years in a market that traditionally commanded long leases, and while this shows managers are being flexible with tenants they need to do more to keep quality tenants, which will protect their values.

"Net investment in the sector remained minimal, at £18m. Without heavy investment, the out of town assets will lose occupier demand and may see income return eroded. Rental values were relatively strong, at 0.7%, managers need to protect this." 

The index shows that business services, transport and communications, financial services and manufacturing occupiers account for 77% of contracted rent passing in S&P parks.  Within the S&P parks most contracted rent falls in the negligible category, which is closely followed by low risk adding up to 60% compared with 66% for IPD offices and industrials and 69% for IPD parks.  Risky income in the maximum and high risk bands contributed to less than a quarter of contracted rent passing.  S&P Parks had a higher proportion of income in those bands at 23%.  IPD parks had 16% whilst IPD UK offices and industrials had 15% of their income classified in the high and maximum risk bands.

Greg Mansell continued: "The Government's plan for regional growth, which is partly centred on the enterprise zones initiative, would do well to take into account the struggling out-of-town office market. The incentives already disclosed have been criticised, and without further offers it will be difficult to tempt investors away from safer assets in London.

"For example, the 1980s/1990s enterprise zones included tax relief on buildings and structures but this is lacking in current plans. At present, it appears that 100% capital allowances will be limited to plant and machinery expenditure in Humberside, North East, West Midlands, Liverpool, Sheffield, and the Tees Valley but such tax breaks will not extend to the building itself, even in these areas.

"On the plus side, 100% business rate relief is proposed for all enterprise zones worth up £275,000 over the first five years. This will provide much needed help to the secondary market in particular, as rates will make up a larger proportion of total occupier costs and therefore should improve the prospects of out-of-town office demand."

Andy Martin concluded: "This year's index illustrates that performance fuelled in the main part by yield compression did lose some momentum from the 2009 bounceback as the year progressed and this is a factor which has also carried through in to 2011.

"The best performance in the next part of the cycle will come from business parks which are able to respond to the estimated 4.5m sq ft of currently live occupier enquiries for the South East.  With the majority of these enquiries for 100,000 sq ft of space and above the majority are likely to be unsuited to existing in-town supply, and it will be interesting to see how successful business parks will be in capturing these opportunities."

Read the full Business Parks Index 2011.