Property ReturnsWith annualised returns currently running at over 30 per cent, the Irish commercial property market will comfortably outpace growth in the UK during 2006, writes Angela Sheahan

Irish commercial property is having another cracking year, with annual total returns running at over 30 per cent in Q3 - well ahead of the UK market.

The latest results from the IPD Quarterly Index show that investors in Irish property received an income return of just under 5 per cent but staggering capital value growth of 25 per cent. Such strong capital gains almost make the Irish housing market look tame.

The strong capital appreciation in Irish commercial and residential property is part of a wider global trend for strong asset price growth.

Around the world (well, with the exception of Germany) property prices are booming. We can put the Irish property boom in a European context by looking at the less timely annual numbers for 2005. Ireland was certainly top of the pile, with annual capital growth of just over 18 per cent, but the UK, Denmark and Spain also saw double-digit price increases. In addition, on the IPD numbers, Swedish, French and Norwegian property produced historically high capital gains in 2005.

One of the key drivers of global property price growth - and the Irish boom in particular - is that there is simply a lot of cash moving around global asset markets in search of a decent return.

The emergency cuts in interest rates after the equity market crash in 2001 helped drive bond yields to historically low levels and fuelled global liquidity.

So, with equity markets suddenly out of favour, property changed from being the Cinderella sector to the asset class of choice.

Despite the recent increases in global interest rates, the broad argument still holds true. Euro-zone interest rates may have moved up from 2 per cent last November to 3.25 per cent today, but this is still low by historic standards.

As an example, the real Irish bond yields are currently running at around 1.7 per cent. And the dividend yield delivered by companies listed on the Irish Stock Exchange is currently running at around 2.2 per cent. So, while Irish commercial property yields have been edging lower (from around 6 per cent in 2006 to 4.6 per cent today), this still beats the yield available on bonds and equities.

Put that together with an annual total return that swamps that available on bonds - and just pips the returns on equities - and you can see why investors are favouring the sector.

Looking ahead, the prospects for the Irish commercial property market seem, on balance, positive.

Although headline "all property" rental growth has stabilised at around 3 per cent this year, this disguises an encouraging revival in both the office and industrial rental markets. In fact, quarterly office and industrial sector rental growth was running at a five-year high in Q3, 2006.

This echoes the encouraging pick-up in Irish industrial production, financial and business service sector output and employment growth over the year. If the consensus of independent economic forecasters is to be believed, this corporate sector recovery will be sustained into 2008.

If historic relationships hold, that would have a positive knock-on impact on rental growth in these sectors.

The news from the consumer sector is a bit of a mixed bag and, therefore, more worrying.

On the IPD numbers, while retail property is still producing the strongest rental growth, the rate of increase is slowing. Indeed, retail rents actually fell outright in shopping centres in Q3 on a six-month annualised basis.

However, as rents tend to follow economic trends, retail investors will no doubt be warmly welcoming the strong rebound in household spending and house prices seen in 2006.

But the resurgence in house prices is a bit of a double-edged sword. With money markets expecting further rises in Euro-zone interest rates, and housing affordability already stretched, the consumer sector looks vulnerable to a slowdown.

Still, there is no denying that, just as the Irish economy is likely to produce economic growth well in excess of its US, Euro-zone and UK competitors in 2006, the Irish property market is also likely to be one of the best performers of 2006.

While the UK market shares a lot of the characteristics of the Irish market - strong capital growth driven by falling yields and a resurgence in office rental growth - the property cycle is more mature.

Despite the arguably stronger evidence of a rental recovery in the UK market, there is also more evidence that the pace at which yields are falling is starting to decelerate.

So, while Irish investors can look forward to a happy Christmas, with total returns around the 30 per cent mark, investors in UK property are likely to get a more modest - but still impressive - 15 per cent to 20 per cent return.

Angela Sheahan is senior analyst with IPD, which is a global provider of performance measurement for the property industry. All UK figures in this article are taken from the IPD UK Monthly Index. All data for Ireland is taken from the IPD Irish Quarterly Index