PropertyPerformance: All property returns of 11.5 per cent for 2004 prove that property is a clear winner as an investment according to the compilers of the IPD Index. Jack Fagan reports
Overall returns from the commercial property market last year were somewhat better than expected due in part to the strong performances by Dublin's Grafton Street and out-of-town retail warehousing.
The latest SCS/IPD Index shows that all property returns for the full year were 11.5 per cent, slightly below the 12.7 per cent reported in 2003 but comfortably above the low point of 2.3 per cent in 2002.
The index covers a broader range of investment properties than in the longer running index compiled by Jones Lang La Salle which has calculated that the market produced returns of xxx last year.
Compared with other assets, property outperformed bonds with returns of 10.7 per cent in 2004 but fell well short of equities where returns surged to 29.2 per cent.
However, Phil Tily of IPD says that on a medium and long-term view, property is still a clear winner with total returns averaging 18.5 per cent over the last 10 years since the end of 1994. This compares with total returns on equities and bonds of 15.6 per cent and 9.6 per cent, respectively.
The London-based IPD has found that last year's returns depended in almost equal measure on the rate of income return at 5.7 per cent and capital growth of 5.5 per cent.
In keeping with the trend in 2003, most of the rise in capital values was due to strong demand from investors, prompting a further fall in yields. The all-property equivalent yield fell by almost 20 basis points, ending 2004 at 5.66, the lower point on record.
While rental values also contributed to the rise in capital values, rental growth was fairly modest by historic standards at 1.8 per cent and was below the annual rate of inflation.
Looking at short-term trends, 2004 ended on an encouraging note with rental growth accelerating to 1.2 per cent in the fourth quarter, from 0.3 per cent in the third quarter. Accordingly, total returns improved to 4.4 per cent in the fourth quarter from 2.4 per cent in the third quarter.
The IPD index shows that the stable performance of the Irish market at the all-property level, comparing 2004 with 2003, masked divergent trends at the sector level.
Although retail continues to be the strongest part of the property market, due to strong rental growth running at 9.3 per cent, total returns slipped from 26.8 per cent in 2003 to 17.9 per cent last year.
The dip in performance was due to a more restrained fall in yields, perhaps suggesting a degree of reluctance among investors to continue bidding yields down.
Conversely, the performance of both offices and industrials improved last year compared with 2003. In the office market, overall returns rose to 7.9 per cent from 6.2 per cent in the previous year as capital values rose modestly by 1.3 per cent.
While rental values continued to slip, declining by a further -1.4 per cent in 2004, this negative influence was more than offset by a favourable fall in office equivalent yields of 13 basis points. This was a more notable fall than reported in 2003, perhaps signalling confidence among investors that office rental values will soon turn the corner.
In the industrial market, total returns strengthened to 9.0 per cent in 2004, from 6.7 per cent in 2003.
While equivalent yields fell broadly in line with the office market, edging down by 10 basis points, industrial had the advantage that their rental values remained stable over the year.
More detailed information reveals that Grafton Street and out-of-town retail warehouses were the star performers in the retail market, with rental growth running at 12 to 15 per cent in both segments in 2004.
In the office market, central Dublin outperformed the suburban market where values continued to fall, while south Dublin proved to be the strongest location within the industrial sector.
