The longest running boom in the commercial property market has finally run out of steam, according to the Irish Property Index. The report, published today by Jones Lang LaSalle, shows that overall returns in the three months up to the end of June were the lowest for any quarter since 1993.
The all property returns of 1.8 per cent for the last quarter compares with a growth of 3 per cent in the first three months of the year and an impressive 6.4 per cent for the second quarter of 2000.
The JLLS figures confirm what has already been well known - that the market has finally faltered after eight years of growth. However, the size of the slippage is probably more pronounced than had been feared.
Since the end of 1998, there have been signs of an easing in the rate of growth in values and returns. A slight resurgence at the end of 2000 bucked the trend somewhat but proved to be short lived.
Margaret Fleming of JLLS says it hardly comes as a surprise that the market is out of breath after nearly eight years of sustained high growth. "Values are now treading water and the focus is on what will happen next."
Although traditionally a cyclical market, few would have expected the buoyant conditions to have lasted as long as eight years. The previous boom ran for less than three years up to 1990. The strong market over the last eight years has allowed a huge number of private investors to build up substantial wealth from their purchase of office, retail and industrial investments.
During some of the peak years - when annual returns hovered between 24 and 39 per cent - private individuals and business syndicates were spending more on property than even the pension funds and the insurance companies. In today's slower market, the institutions seem to have it all their own way and are in no hurry to buy because many of them are already overweight in property.
The slowdown has been anticipated by pension funds and other financial institutions which have been inundated with offers of investment opportunities over the past six months just as the banks and the building societies have been implementing tighter lending criteria. A year ago the institutions could not find sufficient investment vehicles.
The opposite is now the case and despite a favourable interest rate climate, yields are beginning to show signs of an outward movement in response to the weakening market conditions.
Development sites and suburban offices have been the first to be hit under the lending cutbacks. A range of office schemes in the Dublin suburbs are unlikely to see the light of day for at least several years because of a significant fall off in demand.
Some of developers are admitting that the problems facing the US technology market are having a much more drastic effect on the Dublin office market than at first thought. With office rents no longer rising, it is now a tenants' market. The largest developers are hoping that with many of the smaller players out of the suburban market, they will have a clear run in signing up any available tenants.
Jones Lang LaSalle has reminded its clients that the overall returns of 4.9 per cent recorded in its index over the last six months should be put into context.
During the same time frame, nearly all markets have been disrupted. Inflation was 3.2 per cent in the first five months of the year, running at an annualised rate of 5.4 per cent in May last. The first half of the year saw the FTSE Index fall by almost 3 per cent. The Dow Jones Index slipped by 5 per cent and the Nasdaq was down 7.3 per cent. Only the ISEQ went against the trend with a 9.6 per cent increase.
Today's JLLS index shows that the capital element of the overall property return in the last three months was composed of 0.8 per cent growth in values, the lowest quarterly increase since December 1993. This brought the growth in capital values for the year to date to 2.9 per cent. Capital values in the industrial sector proved the most robust in the last quarter, rising by 3.4 per cent and by 5.5 in the year to date. Retail values rose by 1.1 per cent in the quarter, and offices marked time with a 0.3 per cent increase in the second quarter.
Underlying these results is a virtual standstill in yields, according to the index. Margaret Fleming says there is still some element of protection from rental growth and from a benign interest rate environment. Comparatively low interest rates allow the private investor to compete with institutions, thereby capping the level to which yields are likely to drift. However, this protection would only be afforded to bankable properties, and there may be some outward movement of yields for properties with poorer covenant, building quality or locations in the second half of the year.
Just as capital values have slipped, the rate of growth in rental values has also slowed. The JLLS index shows that rental values rose by 1.8 per cent across the portfolio in the last quarter, bringing the half year increase to 4.4 per cent.
Offices showed the strongest growth in rental values at 2.4 per cent for the second quarter as the impact of rent levels achieved for top new buildings filtered through.
