Returns slip in worst quarter since 1993

Overall returns from the commercial property market have continued to slide in the three months up to the end of September, according to two reports published today. The SCS/IPD Index showed all property returns for the quarter at 1.4 per cent while Jones Lang LaSalle (JLL) put the figure at 1.1 per cent. With the property boom well and truly over, it was the worst performance for any quarter since 1993.

The London-based IPD figures show that the relatively flat all property result for the three months stemmed from a minor improvement in the retail market, but this was cancelled out by fading results from the office and industrial sectors.

Overall there was a weakening growth in rental value and a further increase in yields, leading to a near standstill in capital values. Capital growth of just 0.2 per cent over the quarter was a product of a 0.9 per cent increase in rental values but it was offset by a 0.6 per cent rise in yields.

IPD puts the market returns over a 12 month period at just above 15 per cent, largely because of a strong performance in the final quarter of 2000. The JLL figure for the same 12 months is 14.1 per cent while the returns for the first nine months of this year are calculated at 6.1 per cent.

The IPD returns of 1.4 per cent for the three months up to the end of September compared with a growth of 2.3 per cent from bonds. Equity returns plummeted in the same quarter, losing 23 per cent of their value.

IPD has identified a small gap opening up between the three property sectors. Retails rose to the top with a return of 2.4 per cent, followed by industrials with 1.6 per cent and offices with 1.1 per cent. Rental value growth has been the major driver of the retail returns over the quarter, improving from 0.9 over the June quarter to 1.4 per cent in the last three months.

Retail yields, which had remained largely unchanged throughout 2001, rose by just one basis point. At a segment level, the slight uplift in the retail market has been led by shops on Dublin's Grafton Street and on Henry/Mary Street, which earned returns of 3.8 per cent and 4.1 per cent, respectively.

The IPD returns show that the office market has continued to lose momentum, as rising yields caused capital values to fall for the first time since the currency crisis in December, 1993 - albeit by just 0.1 per cent. The rate at which office yields have risen has increased throughout the course of 2001, with a cumulative .17 per cent rise in the first nine months of the year.

The index showed that industrial capital values stood still for the quarter. Any capital appreciation derived from a 0.6 per cent increase in rental values was cancelled out by a five basis point rise in the yields.

Analysis of the JLL figures shows that capital values grew by 3 per cent in the year to date with an increase of only 0.1 per cent coming in the last quarter.

Margaret Fleming, JLL's capital markets director and head of research, says the retail sector has shown the best performance in terms of capital values in the third quarter with a rise of 0.8 per cent.

Looking at the year to date, however, industrial values led the portfolio at 5.9 per cent capital growth followed by offices at 3 per cent and retail at 2.1 per cent. There had been a marginal decrease in the value of office property in the third quarter with capital values down 0.2 per cent, while industrial values rose by 0.4 per cent in the quarter.

The last cycle of rental increases has obviously slowed significantly, Ms Fleming said, but its effect is still being felt in rent reviews.

Income in the portfolio rose by 6.6 per cent in the last three months, reflecting a large number of rent review settlements.

"This increased income provides some protection to the investor in leaner times," she said.