Fall in capital values in last quarter lowest for two years

THE FALL in capital values in the Irish commercial property market began to ease in the final three months of 2009, slipping by -4.9 per cent – the lowest quarterly decline in almost two years, writes JACK FAGAN

The SCS/IPD Ireland quarterly property index, released yesterday, shows that capital values were down last year by 28.9 per cent compared to 2008’s record fall of 37.5 per cent.

This brought the peak-to-trough slippage from September, 2007 to 55.6 per cent.

The study shows that overall returns for the 12-month period up to December, 2009 were down by 23.3 per cent. The retail sector slipped by 25.4 per cent while offices fell by 22.1 per cent and industrial property returns declined by 20.4 per cent.

However, there was a marked slowdown in the pace of decline in the last quarter of the year, falling by 2.9 per cent compared to steeper declines in previous quarters.

The better than expected returns for Q4 in 2009, which suggest that there are signs of some stabilisation of the market, will be particularly welcomed by investors and pension funds anxious to see values bottoming out. Sales of commercial properties in recent months have been few and far between because of the scarcity of bank credit and fears that prices could fall further.

Hopes of a recovery in values and sales are largely dependant on how quickly Nama assumes responsibility for much of the toxic bank debts and how rapidly liquidity is restored to the banking system. In the meantime, overseas buyers, again active because of the much enhanced yields, are finding it difficult to source high quality investments with long term guaranteed rental income.

Yesterday’s IPD report calculated that income returns for 2009 were 7.7 per cent, contributing to an annual return of -23.3 per cent – again shallower that the -34.5 per cent recorded in 2008.

Analysing the twin drivers of capital growth – yield movements and rental growth – over the last two years shows a similar pattern to that in the UK, albeit with different turning points.

As with the UK, yield pressure in Ireland was the overriding influence on capital depreciation in the early part of the downturn. Over 2008, yield impact – which measures the influence of yields on movements in capital values – was a substantial -41.4 per cent while over 2009 this fell to -34.8 per cent.

Over the same period rental growth held positive in the first year following the property crash, at 2 per cent in 2008, but fell quarter-on-quarter throughout 2009. Rental pressure peaked in the third quarter last year at -8.2 per cent, before easing to -6.7 per cent in the final three months.

Annual rental values for 2009 were down 22.4 per cent, confirming that the exclusively yield-driven capital depreciation in 2008 flipped last year. The pressure was divided between slightly softer yields and increased rental weakening, all triggered by recessionary pressures in the wider economy.

IPD found that the spread in the change in capital values over 2009 between the three main sectors was slight – marginally above three percentage points – relative to the annual declines.

The retail sector fell most, by -30.3 per cent, driven by sharp falls in the combined Henry and Mary Street area as well as Grafton Street which were down 31.6 and 31.3 per cent, respectively.

Initial yields for the two districts have risen to 6.1 and 6.8 per cent, up from 3.6 and 3.5 per cent at the end of 2008.

Not surprisingly, commercial property underperformed both equity markets, which delivered returns of 29.9 per cent, and bonds which were also up 3.6 per cent.