Capital values down 37.2% in 2008

The dramatic fall in Irish commercial values over the last two quarters of 2008 underlines how much the market was overvalued, writes Jack Fagan

THE LATEST findings by the London-based researcher Investment Property Databank (IPD) that capital values in the Irish commercial market fell last year by 37.2 per cent was well flagged since last autumn.

However, the findings serve to remind the industry how much the market was overvalued up to last summer.

The UK also experienced a dramatic fall in values in 2008 – down 26.4 per cent – while overall returns fell by 22.1 per cent.

In Ireland the total returns last year on commercial property investments were also in negative territory – down 34.2 per cent.

The dramatic fall in Irish values over the last two quarters – 15 per cent up to September and 17.7 per cent up to December – were unprecedented, partially because they coincided with the credit crunch.

With bank borrowings still not generally available and no reliable indications of when this might change, there is a consensus that the market still has a distance to go before bottoming out.

Not everyone accepts that the dramatic falls in capital values reported by IPD applies to properties at the lower end of the commercial market.

Smaller investors contend that investments under €5 million are unlikely to have been as seriously affected by the slippage in values as more valuable properties, most of which are understood to be owned by institutions or major investors.

IPD says its findings are based on a sample of 325 properties from 12 portfolios covering €3.7 billion.

IPD reported that the most pronounced decline in values, for the fourth consecutive quarter, came in the retail sector which fell 20.8 per cent.

The root cause of the slippage was the pronounced yield impact, at -45 per cent over the year, counteracting the growth in rental values, which rose by 3.4 per cent over 2008 compared to 5.7 per cent the previous year. All property rental value movement remained flat over the final quarter and just 2 per cent for the year.

In offices, capital values fell by 15.8 per cent for the quarter and by -34.4 per cent for the year. Falls in industrials were on the lighter side over Q4, by -15.1 per cent, and -26.2 per cent for the full 12 months. Marginal insulation was provided in income return which, at the all property level, returned 1.4 per cent and 4.6 per cent over the year.

The scale of the final two quarter losses of 2008 has pushed down the three-year annualised total returns to -6.1 per cent for retail, -0.9 per cent for offices and 2.5 per cent for industrials while returns of -2.8 per cent were realised on an all property basis.