Commercial property is nearing the bottom of a cruel cycle so it can be expected to rise soon says Sasha Thomas

THERE ARE REASONS for optimism after another difficult year for Ireland’s commercial property market. The context scarcely needs outlining; the fact Taoiseach Brian Cowen’s coalition government was forced to dissolve underlines the precarious state of the country’s economy.

Given such severe economic and political strains, Ireland’s commercial property return to investors last year, at -2.4 per cent as measured by the SCS/IPD Ireland quarterly property index was not too painful. Compared to last year’s -23.3 per cent and 2008’s -34.5 per cent, the upward trend is substantial.

However, the headline annual total return masks another year of double-digit negative capital depreciation, at -10.7 per cent. This was offset to an extent by Ireland’s highest-ever income return of 9.2 per cent in the index’s 16-year history. The two key components of capital growth – yields and rents – were pushing in opposite directions for most of the year.

Only in the final quarter did the direction of yields reverse and contribute to capital depreciation, with -0.5 per cent in the fourth quarter and 1.5 per cent for the year. In both phases, the impact of yield movements was relatively mild.

So for most of last year, the principal driver of capital growth was falling rents; a staggering -19.3 per cent last year, little better than 2009’s -22.4 per cent.

The upside, though, is relative income strength with a surprisingly healthy lease length among most tenants. The weighted average all-property lease expiry, including break clause, is more than 9.7 years.

The security of the underlying cashflow is still dependent on the economic viability of each commercial tenant, however.

At the sector level, retail and office had the shallowest annual declines in capital growth, both at -10.5 per cent, while industrial saw write-downs of -12.7 per cent. Retail recorded the mildest rental value decline, at -16.5 per cent compared to -20 per cent for office.

However, retail was worse off in terms of total return, at -3.0 per cent, due to a smaller income return of 8.3 per cent, compared to 11.1 per cent and 9.6 per cent, for industrial and office respectively.

Looking deeper into the IPD databank, the shallowest capital depreciation by segment was in the retail sector’s Grafton Street, which fell by -8.3 per cent, compared to -31.3 per cent in 2009.

By contrast, the neighbouring Henry/Mary Street district experienced the second-steepest capital write-downs, at -14.5 per cent, following on from 2009’s -31.6 per cent.

Over the three years since Irish commercial property values started to fall, Henry/Mary Street has fallen by -70.3 per cent, while Grafton Street has seen a -68.4 per cent loss in value.Such substantial declines undoubtedly will start to create investment opportunities when the economy stabilises and confidence in property returns.The bleak mood has begun to lift in Irish commercial property. If we don’t yet know when the end will come, at least we know it could be soon.

Returns were negative last year, but Ireland’s property market, the catalyst of the subsequent macro crisis, remains well placed to recover from its low base. The Irish commercial property market may not have reached the bottom yet, but it is starting to feel like the time when it will stop falling is close.

Sasha Thomas is client manager for Ireland at IPD