MARKET ANALYSISThe performance of the market in Q1 2008 was the worst since the IPD launched its index in 1995, writes Jack Fagan

CONFIRMATION OF the slowdown in the commercial property market has come from the London-based Investment Property Databank. Its latest survey shows that the market had negative returns of 2.3 per cent in Q1 2008, the worst performance in the index since it was launched in 1995.

Moreover, the poor results bring to a close 23 straight quarters of positive performance, an unprecedented reversal that has dragged the 12 months total to the end of March to 4.9 per cent.

The IPD findings come three weeks after the longer running Irish Property Index from Jones Lang LaSalle reported that the market fell by minus 2.7 per cent in Q1 2008. The bad news from both camps was still not as disappointing as the UK commercial property index which showed that the capital value of investments declined by 4.6 per cent in the first quarter and that total returns were also in negative territory, falling by 3.3 per cent - the third straight quarterly decline.

The IPD study showed that the capital value of Irish commercial property fell by 3.3 per cent in the first quarter. This turnaround was driven by a sudden collapse in investor confidence, triggered by pervasive financial sector uncertainty.

The overriding issues for investors are now probably linked to the underlying economic fundamentals which will determine the strength of occupier markets over the coming years.

Although rental value growth remained positive at 0.7 per cent in the first three months of 2008, it dropped from 1.5 per cent in the preceding quarter and is the poorest result for the past 12 months.

Retail saw the sharpest reversal with total returns falling to minus 2.8 per cent, compared with a growth of 1.6 per cent in the three months up to the end of December 2007. Industrial properties were the only sector with a positive total return, earning investors 0.4 per cent in the period. Total returns for the office sector were minus 2.4 per cent over the same period.

IPD research manager Angela Sheahan said the outward movement in yields in quarter one reflected a pricing correction which needed to happen because property yields had been pushed so low over the previous five years. The situation was aggravated by the lack of available debt and uncertainty in the global financial markets.

In the UK, the IPD index showed that the annualised all property returns for the 12 months up to the end of March fell by 9.7 per cent, the worse since the index began in 2001. Still, the decline in capital values in Q1 2008, at the all property level, was less than half the minus 7.5 per cent drop in the three months to the end of 2007. Further, rental values continued to rise in Q1 2008, albeit at a noticeably slower rate, but still contributing positively to capital growth.

Just as in Ireland, the main concern is about the dangers of an economic recession, the strength of occupier markets in the immediate future and thus the path of future rental growth.

With credit markets still largely frozen and divergent opinions on future interest rate movements, IPD says it remains very difficult to predict a rapid recovery in property performance.

Dr Ian Cullen, co-founding director of IPD, says that while the first quarter results clearly indicated a deceleration of the market slide, this attenuation still left the UK property investment sector in negative territory for both capital growth and total return. "Income returns remain solidly positive as occupation levels remain strong, but the continuation of occupier demand is clearly contingent upon the next stage in the emergence of the wider economic response to ongoing financial uncertainty."

Report says 'forced sales' possible in Irish market

THE POSSIBILITY of "forced sales" of commercial property in Ireland has been raised for the first time by agent Jones Lang LaSalle.

The company director, John Moran, says that until such time as there is a significant further "re-pricing" or an improvement in the availability and cost of credit, investment activity levels in Ireland would remain subdued. A number of institutions had incurred significant redemptions and had closed their funds. "This may lead to forced sales at some stage."

Moran acknowledges that Irish investment activity was very limited between January and March of this year, with only €52.5 million of deals concluded. A further €110 million of deals were at "sale agreed" stage or under offer.

According to a new report from Jones Lang LaSalle, commercial properties worth €600 million remained on the market, much of them either of poor quality and /or overpriced.

The report says that the industrial sector accounted for 50 per cent of all transactions in Q1 2008 with two deals totalling €26 million transacted. The retail sector had 11 per cent of the activity, down from 18 per cent in the same period last year. The majority of domestic commercial property transactions were for lot sizes of less than €4 million. There was a lack of large lot size transactions.

Office investment yields had moved significantly since September last, according to the report, rising from 3.7 per cent to over 4.5 per cent "and are under pressure to move further".

Yields in the logistics sector were more than 5 per cent.

High street prime retail and shopping centre yields were now starting to move upwards in response to weaker trading conditions.

Moran says that one of the reasons why the Irish market was suffering from such inertia was because investors felt that properties did not represent good value.

"While investment activity is down 42 per cent compared with the same period last year, there is still no shortage of buyers for good quality product - provided it is correctly priced.

"What the market is clearly saying at the moment is that pricing isn't correct yet. The reason why a lot of the €600 million worth of commercial property isn't selling is because it's either of dubious quality, or too expensive. Stamp duty remains an issue."

The report says that Irish investors spent €1.5 billion on property overseas during Q1 2008, down from €2.02 billion in the same period last year.

The UK remained the dominant overseas investment destination, receiving almost 73 per cent of Irish overseas property investment. It was followed by Germany (3 per cent), The Netherlands (8 per cent), Denmark (13 per cent) and the US (3 per cent).

Over 44 per cent of Irish deals in the UK were in the €60-€120 million category, which demonstrated that large deals continue to be transacted despite the current economic conditions.

Large lot sizes of over €100 million were becoming scarce due to debt syndication issues for the banks.

The general investor sentiment was cautious, with value being sought. Debt for the right buyers was still available but expensive.