Market may be stabilising

The latest SCS/IPD index shows that the commercial property market may be improving , after a 59 per cent fall in values over three years

THE write-down of capital values in the Irish commercial property market has now run for a full three-year period with a peak-to-trough

collapse of 59 per cent. However, the latest SCS/IPD Property Index suggests that there are encouraging signs that the market may at last be stabilising.

The steepest value write-downs over the three-year cycle were in the Henry Street/Mary Street area where the slippage reached 69.1 per cent. Grafton Street was only marginally behind, with a fall of 67.5 off peak values.

The index showed that property values fell by 2.6 per cent over the three months up to the end of September but combined with a 2.3 per cent income return, contributed to a third quarter overall return of -0.3 per cent.

The third quarter depreciation in capital values represents an improvement on the -3.5 per cent fall over the three months to June. This was the result of two factors:firstly, the softening rental declines, from -7.5 per cent in Q2 to -5.2 per cent in Q3, and secondly because of a modest, but favourable, correction in yields for the first time in three years. Yield impact, which measures the impact of yield movements on capital values, was 1.1 per cent over the third quarter. Over the full three years since capital values started falling, equivalent yields increased from 4 per cent in Q4 2007 to 8.3 per cent at Q4 2009 before a modest 20 basis points compression to 8.1 per cent at the end of Q3 2010.

Rents started to decline from Q1 2009 and have now fallen by 34.2 per cent over seven consecutive quarters to the end of Q3, 2010. Over the year to date, rents have dropped by 15.2 per cent.

The deep-13.4 per cent rental falls in Henry Street/Mary Street over the second quarter have given way to a more muted -1.5 per cent decline – shallower than the -5.2 per cent average rental fall.

Sasha Thomas of IPD said that after the rental deterioration over Q2, the Irish market had been braced for further capital write downs. “The picture remains mixed:while rental pressure has eased again and yields have stabilised, uncertainty in the market still lingers given the state of the broader economy.”

Peter Stapleton, president of the Society of Chartered Surveyors, said they expected an increased supply of investment property in 2011 which would satisfy some latent demand from cash purchasers.