Returns of 6.8% point to gradual slowdown

The latest returns from the Irish commercial property market show that there has been a gradual slowdown in the pace of growth. Although the Jones Lang LaSalle Property Index puts overall returns at 6.8 per cent for the first quarter of 1999, it is the most modest growth in any quarter since the beginning of 1998.

Returns for the year to March, 1999, are strong at 39 per cent but the annual return will almost certainly be lower by year end when the strong performance in the last two quarters of 1998 drops out. In spite of the relative slowdown, growth is still stronger than some predicted. Capital values of commercial property rose by 5.6 per cent in the first quarter, suggesting an annual increase of 20 per cent or more if sustained.

The office sector led capital performers with values rising by 6.9 per cent in the quarter and by 35.2 per cent in the year to March, 1999. Retail property was next, with a 6.1 percentage point rise in the quarter and 31.9 per cent in the year to March, 1999. Industrial stock took up the rear, with capital growth of 5.5 per cent in the first quarter of 1999 and 15.9 per cent in the year to that date.

Margaret Fleming of Jones Lang LaSalle says capital values have been fuelled by low interest rates and a diverse range of new entrants to the market, some competing for property using different, more aggressive, criteria than traditional players. It is possible, she says, that the slowdown in the pace of capital growth is a kind of plateauing, as interest rates available to borrowers bottom out and the risk/return ratio looks a little more predictable.

Property yields have fallen over the past 18 months, as they have re-based against the cost of money and returns from other investments. Although there is scope for changing yields, she says the scale of alteration must be lower.

On the rental front, the cost of renting continues to rise across all sectors. Estimated rental values increased by 3.7 per cent in the first quarter of 1999 and by 14.6 per cent in the year to March, 1999. Offices are in front with a 4.6 per cent rise in the quarter and 17.2 per cent in the year to March, 1999. A low vacancy rate combined with high demand for the last four years is a happy coincidence for the landlord if not for the tenant.

Retail rents grew by 1.8 per cent in the quarter and 12.8 per in the year. This too is a slowing of pace, perhaps related to the influx of new retail space in 1997 and 1998 settling in to the larger retail picture. Industrial rents showed greater bounce, rising by 3.7 per cent in the quarter and 6.4 per cent in the year. This bucks the trend and is due to a general shortage of rental space. It also takes account of the rising rent of some older properties.