Irish returns ahead of the UK PropertyYields

Irish commercial property performance outpaced investment returns in the UK during 2005. Property here also delivered higher returns during last year than either equities or bonds according to the SCS/IPD Irish Index, which was released at a presentation in Dublin last Friday.

The figures show that property investment growth enjoyed another freewheeling year, with the highest returns here since 2000.

The Index offers a note of caution for 2006 however, with uncertainties in both Ireland and the UK over the performance likely from the office sector.

Irish commercial property investment delivered total returns of 24.3 per cent in 2005, the Index report indicates. This surged ahead of equity returns at 21.7 per cent and bonds at 8 per cent.

The remarkable returns figure is nearly double the 12.7 per cent return seen here during 2003 and 11.5 per cent recorded in 2004. And yet the returns seen in those years rode significantly higher than annual inflation, thus delivering a genuine return on investment.

In the UK, commercial property investors enjoyed their highest returns since 1993, yet equities outperformed property during 2005. Total return in the UK was 19.1 per cent for the year while equities delivered 22 per cent returns.

UK property shares outpaced their physical and paper peers in 2005 with returns of 23.3 per cent while gilt returns were 7.4 per cent.

Income return was a bit higher in the UK, standing at 5.6 per cent compared to 5.3 per cent in Ireland.

Yet capital growth was much faster in the Irish market with an 18.1 per cent increase in capital values here, the sixth highest increase on record, compared to 12.8 per cent capital value rise in the UK market.

The SCS/IPD outlook for 2006 is a bit less bullish however, with its chief area of concern the office sector.

"One key area of uncertainty will be whether the office market can continue its recovery and achieve rental growth in excess of the rate of inflation for the first time since 2001," it says.

Recovery in the central London office market has been sluggish given an over-hang of supply.

Equally, City rental growth was barely positive in 2005, although the West End managed to give better returns and top inflation.

"It remains to be seen whether the Irish office rental growth follows the UK pattern and stutters along for a couple of years, or manages to surge ahead and achieve the double-digit growth that characterised the end of the previous decade," the Index report added.

The picture for 2005 showed that office returns in Ireland climbed to 23.7 per cent with the comparable UK figure at 20.4 per cent. Income return for last year was matched in the two jurisdictions at 6.1 per cent, but Irish capital growth in the office sector reached 16.7 per cent compared to 13.6 per cent in the UK.

Irish retail returns climbed to 27.4 per cent in 2005, their best performance since 1998. Returns on retail in Grafton Street reached an outstanding 30.3 per cent and were higher than those in Henry/Mary Street at 19.1 per cent.

In the UK for 2005, retail returns reached a still credible 18.8 per cent.

Industrial returns in the UK managed to reach 18.4 per cent, compared to 16.2 per cent in Ireland.

Looking at rental values from an all-property level, moderate growth was seen in both markets but only floated close to inflation rates, with 3.4 per cent rental value growth in Ireland and 2.7 per cent in the UK.

"Accordingly it was falling yields that were the mainstay of capital growth last year," the Index states.

"The Irish property equivalent yield declined by 74 basis points in 2005, adding 15.1 per cent to capital values. In the UK, falling yields boosted all property capital values by 11.5 per cent."