Investment returns from Irish commercial property, as measured by the IPD Ireland Quarterly Property Index, have cooled in the first quarter of 2015, as the market appears to be stabilising following the initial bounce-back recovery of 2014. Q1 returns closed at 4.3 per cent in the three months to the end of March 2015, down from the 8.6 per cent returned in the final quarter of 2014. The cooling returns do not suggest a slowing market, rather a stabilising in performance given the aggressive capital and rental value growth that occurred in 2014.
Significantly, returns were more balanced across Irish property types, segments and sectors in Q1 compared to previous periods in 2014, as sustained value growth was recorded across the vast majority of the market. Central Dublin offices again led the way, as capital values climbed by a further 4.2 per cent meaning values are now 44 per cent off the 2007 peak, compared to a 65 per cent decline two years ago. Like in previous quarters, much of the strong Dublin office performance came thanks to rental value growth, as demand for prime space in Dublin pushed rents up by a further 4.2 per cent. Impressively, Dublin office rents have climbed at an average annualised rate of 15.6 per cent over the last three years, highlighting the impressive recovery in demand in line with the economic revival.
The retail sector continued to improve, albeit lagging both offices and industrials, with a return of 2.6 per cent, as rents grew at a more modest rate of 0.2 per cent in the last quarter. Crucially, retail rents saw sustained growth outside of Dublin again in Q1, with provincial retail rents improving by 0.7 per cent, as the economic and property recovery spreads beyond Dublin. The pick-up in regional performance was most evident in the shift in yield pricing – a key sign of the warming confidence of investors and willingness to look beyond central Dublin. Initial yields for provincial retail properties fell by 0.6 per cent to close out March 2015 at 8.9 per cent representing the strongest pricing shift of the retail sector in 2015 to-date.
The emergence of consistent value growth for shops outside Dublin was mirrored by the capital and rental improvements for Shopping Centres and Retail Warehouses nationally. Most significant was the yield shift for retail warehouses, as initial yields fell from 8.0 per cent in December 2014 to 6.2 per cent as growing levels of transactions and improving consumer confidence lower the risk profile of this property type. Shopping Centres were more stable, with yields effectively unchanged at 6.8 per cent as the market awaits the outcome of a number of major deals in the Dublin suburbs to set the pricing precedent for super-regional centres.
Overall, index returns for Irish property have been more muted in the first quarter of 2015 compared to the buoyant rebound of last year. Stability and consistency will now be crucial to maintaining confidence in the sector and ensuring the recovery continues to spread nationally.
The fact that rents and values are growing for the majority of locations outside Dublin highlights, that at least so far in 2015, the economic recovery is broadening and investor’s appetites are growing.
Like in the UK, where next month's general election and potential for a European Union referendum plays heavily on investor (and occupier) mindsets, ongoing political and economic stability in Ireland will be crucial to maintaining investor interest in Ireland in this, the final year of the Government's term. Colm Lauder is senior associate at MSCI Real Estate – IPD
