Property returns up - but still no match for equities

Investments: A return of 2.4 per cent in the property sector in the third quarter is a slight improvement over previous returns - but cannot compete with 3.2 per cent returns shown by equities. Jack Fagan reports.

The Irish commercial property market has failed to measure up to either equities or bonds for the second time this year.

The SCS/IPD Index for the third quarter shows that, while conditions in the property sector continued to improve and showed a return of 2.4 per cent, it was only fractionally better than the 2.3 per cent recorded in the June quarter.

Returns on European five-year government bonds bounced back from a poor result in the June quarter to show a growth of 3.8 per cent. Although down on the opening six months of the year, Irish equities compared favourably with property at 3.2 per cent.

Nevertheless, the gradual strengthening of the property market is underlined by an annualised return of 10.9 per cent, which compares favourably with a corresponding figure of 8.8 per cent for the 12 months to September 2003.

It is hardly surprising therefore that there has never been such a build-up of money waiting for suitable property investments to come on the market.

Pension and property funds, which usually avail of a strong market to sell on older stock, are not only holding on to their investments but are actively competing for any pre-funding opportunities, particularly in the office sector. This has left private investors with no option but to move into the UK where everyone is trying to buy "off market".

Even at this stage, it is clear that by the end of the year Irish investors will have spent the guts of €2.4 billion in the UK compared to only €800 million in Ireland.

The SCS/IPD Index shows that capital values in Ireland rose by a further 1 per cent during the third quarter with gains again being reported in all three sectors of the market. The increase in values was in part driven by a 0.3 per cent improvement in rents. Coupled with this, yields fell to a record low of 5.76 per cent.

The performance gap between the three sectors has been reduced slightly over the last three months. Retails remain the frontrunner with a return of 3.2 per cent but office gained some ground, rising to 2 per cent in the September quarter.

The index shows that retails lost a little of their momentum from the June quarter, but remain the only sector where rental values continue to rise. Capital growth of 2.2 per cent reported in the retail sector during the September quarter was almost entirely dependent on a 1.9 per cent uplift in the rental values over the period.

This was accompanied by a slight, but nonetheless favourable, reduction in yields.

With a return of 2 per cent, offices remain a little off the pace of the overall market. Capital values in this sector have recovered some ground in 2004 and increased for the second quarter in succession.

A 0.3 per cent rise in office values in the September quarter was the net result of a 0.4 per cent decline in rents and a further reduction in yields.

Conditions in the industrial market remained largely unchanged as they, too, recorded a return of 2 per cent last quarter. Industrial rental values edged down by 0.12 per over the three months but yields continued to fall helping values rise by 0.3 per cent over the period.

Measured annually, the retail sector continues to overshadow the rest of the market with a return of 19.8 per cent, underpinned by capital growth of 14.9 per cent.