€1bn looking for home in Irish market

MarketReports: After a strong performance in 2005, competition for the relatively few investment opportunities in the pipeline will intensify, writes Jack Fagan

Agents specialising in the investment market estimate that there is probably up to €1bn waiting for a home in the Irish commercial property market.

Competition for the relatively few investment opportunities in the pipeline will undoubtedly intensify following the publication today of the latest SCS/IPD index which shows that the overall returns from the market last year were 24.3 per cent. This is the highest level of return since 2000 and is roughly double the 12.7 per cent and 11.5 per cent recorded in 2003 and 2004, respectively.

Another index conducted by Jones Lang LaSalle, which monitors a smaller number of investment properties, produced an even more surprising result, putting the overall returns at 25.7 per cent.

Both indexes agreed on one thing: capital growth, particularly in retail, was the driving force of the very strong performance.

IPD reported that retail returns were up 27.4 per cent with Grafton Street doing particularly well. Shopping centres and retail warehousing also fared well, though there are signs that the latter sector may run out of steam before too long because of over development in some cities and towns.

Overall, IPD calculated that office returns in Ireland climbed to 23.7 per cent. In central Dublin total returns in Dublin 1, 2 and 4 were fairly similar at 27.4, 24.7 and 25.5 per cent. These three areas have shown the same level of relative resilience during both the recent downturn (which can be defined as the period from June, 2002 to the end of 2004) and last year's upturn.

During the downturn, rents in Dublin 1 fell by 0.8 per cent but larger falls of 2.9 per cent and 6.2 per cent were recorded in Dublin 2 and 4. In 2005, Dublin 1 saw a 1.3 per cent rise in rental values compared with a 0.9 per cent increase in Dublin 2. Dublin 4 rental values were unchanged throughout 2005.

Dublin 1 has been rewarded for this improvement in the form of 110 basis point decline in the equivalent yield. Dublin 2 and 4 have seen gentler falls of 88 and 99 basis points, respectively.

In the industrial market, south-east Dublin returns stand out at 35.2 per cent. In 2005 these properties have benefited from a 7 per cent rise in rental values and a 105 basis point fall in the equivalent yield - changes that may in part reflect a degree of anticipation of future capital uplift should a change of use to retail or residential occur.

Returns in south-west Dublin and north Dublin have been less impressive at 14-15 per cent, rental values have remained static while equivalent yields have declined by just under 50 basis points.

Looking forward to 2006, IPD says that 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.

In the UK, the recovery in the central London office market seems to have stalled as the overhang of supply dampens the market. City rental growth is barely positive while in the West End the rate of rental growth was fairly constant at 2-3 per cent throughout 2005.

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

The Jones Lang LaSalle index underlined the fact that capital growth was the main driving force of the market in 2005 as yield compression continued right up to the year end.

The study by Dr Clare Eriksson showed that capital value increases for the year to last December were 20.1 per cent and 6.8 per cent in the final quarter. Retail capital values put in the strongest performance during the year with a rise of 23.1 per cent.

Office capital values also achieved high levels of growth - 6.2 per cent in the fourth quarter of 2005 and 19.2 per cent in the year. Industrial capital values made a comeback, moving from 3.9 per cent in 2004 to 13.5 per cent in 2005. Capital value rises for the fourth quarter for the retail and industrial sectors were 8.5 per cent and 4 per cent.

Dr Eriksson contended that rental values were the poorest performer in 2005 and consistently lagged behind the surge in capital values. The estimated rental value index incorporating all three commercial sectors grew by 1.1 per cent in the fourth quarter of 2005 and by 2.7 per cent in the year.

Retail rental values did best with a quarterly rise of 4.1 per cent and an annual increase of 8.5 per cent. More surprisingly, the JLL index said that the annual rental value increase in the industrial sector of 3.1 per cent compared with a rise of only 0.1 per cent in the office market. Both office and industrial rental values remained unchanged in the last quarter of 2005.