Returns up 3.1% in recovering market
Though commercial property values fell last year by 6.4 per cent, overall returns were up 3.1 per cent, buoyed by a double digit income return of 10.1 per cent.
Not only was this the first year of positive returns for the Irish market since 2007, the outcome was also 60 basis points higher than the UK and, even more surprisingly, one of the highest measured around the world by international researcher IPD.
The raft of measures introduced by the Government last year to bring some relief to the struggling market did not have an immediate effect on the overall performance. Eurozone contagion fears and slow economic growth continued to negatively impact on investor sentiment and occupier demand but they have gradually helped to restore confidence in some prime areas.
Stamp duty reductions, a moratorium on capital gains tax and a final decision on retrospective rent reviews all brought much needed stability and as a result capital declines, particularly in the office sector, slowed throughout 2012 ending up down 6.4 per cent – compared to a fall of 11.4 per cent in the headline level in 2011. Values are now down 67 per cent since the peak in 2008.
The SCSI/IPD quarterly property index notes that a number of “big name” tenants have moved to Ireland over the past two years, attracted by improved Irish competitiveness, maintenance of low corporation tax, a well educated workforce and discounted rents – 48 per cent below their peak.
The report says that improving tenant demand has attracted the attention of investors interested in heavily discounted assets. Last year saw some of the first big sales in the office market to overseas investors willing to move up the risk curve.
Phil Tily, IPD managing director for UK and Ireland, said initial yields in Ireland were in excess of 9.5 per cent and as returns across Europe had slowed in a difficult year, for those willing to consider counter cyclical investment plays, Ireland offered the opportunity to edge up the risk curve. Furthermore, GDP for the year was expected to be positive and though under 1 per cent it was the second consecutive year of growth (after 1.4 per cent in 2011) and this may boost the confidence of investors, valuers and occupiers. “While Ireland is certainly not yet out of the woods, for the first time in five years there have been some encouraging signs around the market,” said Tily.
Roland O’Connell, president of the Society of Chartered Surveyors Ireland, said there had been a marked increase in enquiries and now sales for good quality stock in well-located, well-serviced, modern buildings with an ability to attract strong tenants. Any recovery in Ireland, like the UK three years ago, would start in the prime, less risky areas.
The IPD index showed that offices did best in 2012, delivering a total return of 4.9 per cent despite a 5.4 per cent fall in values. Occupier demand improved in 2012. Rents fell in the first quarter by 0.8 per cent but by Q4 this had eased to just 0.1 per cent and in some prime sub sectors was positive.
Dublin docklands recorded positive capital movements in the last three months of 2012 and positive rental growth of 0.2 and 0.8 per cent respectively for the first time in five years. Docklands delivered a return of 8.4 per cent in 2012, ahead of the City of London which reached 6.6 per cent.
Retail continued to suffer at the hands of weak consumer spending, leading to poor occupier demand. Total return was just 0.5 per cent for 2012 as values slumped by 7.6 per cent. Retail rental values – a measure of occupier demand – fell 5 per cent in 2012. But rental values varied nationally with Grafton Street bearing the brunt of the decline while Henry and Mary streets fell 1.3 per cent. Cork city centre rents fell 4.9 per cent while those in Limerick city were back by 4.5 per cent.