Values in freefall after worst Q2 returns in 35 years

The latest results from the Jones Lang LaSalle Irish Property Index will set alarm bells ringing in the industry, writes Jack Fagan

THE COMMERCIAL property market has suffered its worst quarterly performance for at least 35 years because of plummeting retail and office values and weakening rental growth.

With rents the important long term driver of returns for property, the news will set alarm bells ringing in an industry where capital values are effectively in freefall.

Total returns - the combination of rental income and capital growth - slipped by 7.4 per cent in the second quarter, the biggest fall since Jones Lang LaSalle first launched its Irish Property Index in 1973.

The overall decline in the first six months of the year now stands at 9.9 per cent.

Capital values in commercial property generally fell by 8.5 per cent between April and June while overall rents just managed to stay in positive territory, rising by 0.2 per cent.

The dramatic slippage came after the market reported negative returns (down 2.7 per cent) in the first quarter of 2008.

The worsening scenario suggests that the collapse in investor confidence has happened much more rapidly than in the past because of fears of an economic downturn following the credit squeeze and the collapse in the stock market value of Irish banks, although the share prices of some banks rallied sharply last week.

Further falls in the commercial property market could have a direct impact on business life and on future retail and office developments as well as on savings and pension funds.

Overall, sentiment has obviously not been helped by a widely publicised prediction from property adviser CB Richard Ellis that shops on Grafton Street will not sell unless the asking prices are reduced by up to 50 per cent. Vendors are in no mood to accept this advice.

Nevertheless, the biggest single fall in capital values during the second quarter was in retail property which slipped by a staggering 9.5 per cent, ahead of the 8.6 per cent fall in the office market.

Both sectors are now showing an overall fall of 11.7 per cent in the 12 months to the end of June. The industrial market did somewhat better with values dipping by 2.5 per cent in the second quarter compared to an overall figure of 2.7 per cent over the 12-month period.

The Jones Lang LaSalle study shows that income in the portfolio continues to ameliorate the falling values.

Rental income rose by 0.2 per cent in Q2 as against a growth of 2.1 per cent in the year to June. Current income yields on property now average 4.1 per cent. This breaks down further to 5.5 per cent on industrial property, 4.3 per cent on offices and 3.4 per cent on retail investments.

Rents in the office sector did best, rising by 0.5 per cent in Q2 and by 5.1 per cent in the year to June. Rental values in the industrial market remained unchanged from Q1 and increased by 1.1 per cent over the year. Rents in the retail area declined in the quarter by 0.3 per cent but showed a year-on-year growth of 3.7 per cent.

Gemma Sturdy of Jones Lang LaSalle's research department said the overall returns clearly reflected the deterioration in the general economic climate and the ongoing effects of the credit crunch on bank lending and interest rates.