Market hit as values and rents fall further

Despite previous signs of stabilisation, capital values and rents for offices, retail and industrial properties fell by a higher margin in the second quarter

THE beleaguered Irish commercial property market took another hit in the three months up to the end of June, when overall returns deteriorated further. The setback was all the more surprising because in the two previous quarters there were signs of a period of stability ahead.

The Irish Property Index published yesterday by Jones Lang LaSalle showed that capital values and rents for all three sectors – offices, retail and industrial – fell by a higher margin than in the first quarter of this year.

The slippage in capital values for commercial property generally was 5.7 per cent in Q2 and -7.2 in the first six months of this year this year. The poor sentiment coming from the commercial property market is hardly surprising given the unprecedented fall in values over the past three years, the rental concessions granted to a substantial number of tenants, and the virtual suspension of investment activity pending the outcome of the Government’s threat to introduce legislation abolishing upwards-only rent reviews in existing leases.

Jones Lang LaSalle estimates that capital values may fall by an estimated 20 to 30 per cent if downward rent reviews are permitted.

The industrial sector continued to experience the sharpest decline in capital performance in Q2, falling by 7.1 per cent and by 17.4 per cent year-on-year. Capital value for offices fell by -6.2 per cent in Q2 and by -10.4 over the past 12 months. Retail values also dropped with a -4.6 per cent decrease in Q2 and -9.9 per cent in the year to June. Research analyst Hannah Dwyer said that despite the rate of decline in capital values slowing in Q1, the negative growth in the second quarter of the year was the highest quarterly value decline recorded by the index since Q4 2009.

Rental values across the entire index portfolio fell by -4.6 in Q2, reflecting the continuing pressure on occupational markets and attractive inducements being offered to prospective tenants.

Jones Lang say that rental values in the office sector were hardest hit, falling by -6.4 per cent in Q2 and by -18.3 per cent in the 12 months to the end of June. The retail sector performed equally poorly, with a -3.1 per cent decrease in rental value from the previous quarter and a -15.7 drop year on year. Industrial rental values were also under pressure, with falls of -2.1 per cent and -17.8 per cent in the quarter and year, respectively .

One of the few positive messages from the latest results is that income fell at a slower rate than in the previous quarter. Although there was a yearly decrease of 12.9 per cent, only a 2.5 per cent fall was experienced in Q2, compared to -4.8 per cent in the previous quarter.

Dwyer says the reduction in income can be largely attributed to a continued increase in the number and size of landlord incentives being granted to tenants experiencing trading difficulties, primarily in the form of rental abatements and reductions.

Encouragingly, the report says that the overall income yield in the portfolio compares well with the previous quarter and now stands at 8.7 per cent.

“This strong rate of income return is a continued sign of yield stabilisation, and the main positive for the Irish commercial property market going forward,” says Dwyer.