This year marks the 30th anniversary of IPD analysis for the Irish commercial property market. The establishment of the SCSI/IPD Ireland Quarterly Property Index allowed investors to quantify performance of real estate accurately. As further indices were launched, direct comparisons with markets around the world became possible, effectively globalising real estate investment and increasing transparency. The SCSI/IPD Ireland Quarterly Property Index has since measured three full boom-bust market cycles; the most severe being the most recent.
Phil Tily, executive director and head for the UK & Ireland, IPD, was one of the key instigators of this Index, and he commented during the 30th anniversary dinner that: "IPD is delighted to have been measuring the performance of the Irish market dating back over 30 years, where major institutional investors have led by example and embraced the philosophy of transparency that has helped inform their investment strategies.
“This performance history is now helping provide strategic guidance for the new wave of international capital targeting the market.”
The 2013 index results, which were launched last week in Dublin, marked a significant year for the Irish market. Total returns strengthened consistently, quadrupling from the first quarter to the last. Property values began to grow in all sectors, rents strengthened and both investor and occupier sentiment warmed. However, 2013 did not just provide investors, and the economy alike, with a momentous turning point after six consecutive years of decline, but provided strong above long-term average returns for the Irish market.
In the early days of the Index, Irish investors, particularly large institutions, dominated the market, along with the significant involvement of London-based firms. As a result, Ireland tracked the UK market closely, and both markets crashed in the early 1990s.
Market gains
The Irish market made gains in the late-1980s as institutions increased their portfolio allocations to real estate, and rental growth pushed returns to record levels driven by increased occupier demand from newly liberalised financial markets.
However, following the collapse of the UK market in 1990, Irish values declined between 1990 and 1993. This had a significant effect on the psyche of institutions as they began to reduce their weightings to real estate dramatically, with a large part of the balance being taken up by private investors.
The export-driven growth behind the Irish economy in the early 1990s and the emergence of the Celtic Tiger meant the Irish property market recovered at a faster pace than the UK. This was a fundamentally healthy market cycle compared with 2004-2007.
The cycle was driven by occupier demand leading to rental value growth (rents surged by 87 per cent between 1996 and 2001) rather than investors merely competing for assets. Closely linked to the broader economy, this rental trend was also due to massive job growth and increased consumer spending boosting occupier demand for space.
Decline took hold in 2001 as the effects of the dot-com bubble burst and 9/11 were felt by Ireland's highly globalised economy, but in contrast to the credit-fuelled cycle of 2004- 2007, the market drivers couldn't have been more different. This cycle saw value growth driven almost solely by investor speculation, with yield impact the dominant driver, particularly in 2005 and 2006, which drove equivalent yield compression to a record low of 3.4 per cent by the start of 2007.
Predicted growth
In 2013, real estate seems to be back on track, though the growth has so far been driven by Dublin, with office values increasing by 10.4 per cent and rents growing by 10.1 per cent, matching the predictions of many in the industry.
Already 2014 appears to be off to an impressive start, with investor sentiment improving across all sectors of the Irish market, including weaker segments like provincial retails which recorded strong a positive yield impact towards the end of 2013.
Growing competition for Irish assets is encouraging investors to look beyond the prime Dublin office markets – in part a result of the nonexistent development pipeline during the downturn – which in turn is leading to growth again in the retail and industrial sectors as investors reconsider their options.
Colm Lauder is an Associate and Market Consultant for UK and Ireland at IPD in London
FIRST ANNUAL CAPITAL GROWTH SINCE 2007
Irish commercial property returns rose to 12.7 per cent in 2013 as the market finally swung into positive territory. The IPD/SCSI Ireland Quarterly Property Index showed that values rose by 3.2 per cent for the year, the first annual capital growth since 2007, while income returns averaged 9.2 per cent.
Real estate values began to grow in Dublin’s prime office market at the start of 2013 but headline level capital growth did not emerge until Q3, halting a 23 quarter decline that has seen values fall by more than 65 per cent.
Overall quarterly returns reached 5.7 per cent off the back of capital growth of 3.6 per cent. Bonds and equities delivered 3.9 per cent and 9.4 per cent in Q4 and 13.1 per cent and 35.6 per cent for the year as a whole. JACK FAGAN
