Commercial property comfortably outperformed the stock market last year, writes Jack Fagan.
The commercial property market delivered exceptionally strong returns in 2006 because of a surge in capital values.
The Irish Property Index produced by Jones Lang LaSalle (JLL) shows that the sector once again outperformed the Irish stock market last year with overall returns of 28.5 per cent, the highest since 1999.
A second index compiled by the London-based IPD - due to be published next week - is expected to put all-property returns at around 27.3 per cent.
Both results are in line with expectations and are likely to attract substantially more investment funds into a market that is already oversubscribed and has a huge weight of money waiting for new opportunities.
Last year only €3 billion of the €11 billion spent by Irish investors found a home in Ireland. The remainder went overseas.
The JLL index is based on 32 properties valued at €615 million while the IPD study looks at institutional properties worth €5.8 billion.
"The property market last year experienced the type of growth level previously seen before the millennium and, in spite of a strong growth in the ISEQ index, beat the local stock market for the third time in the last five years," says Dr Clare Eriksson, head of research at JLL.
Property's overall returns increased by 28.5 per cent in the year, just ahead of the 27.8 per cent growth in the ISEQ overall index in the same period. The property market last experienced such high levels of overall growth in 1999 (29.4 per cent) and 2000 (27.7 per cent).
Capital growth was the main driver of the performance of the index in 2006 with an uplift of 23.1 per cent, according to JLL. Industrial property led the way in 2006 with annual capital value growth of 24.9 per cent, replacing the retail sector which had the highest year-on-year growth of the commercial market for the five years previous to 2006.
However, retail followed closely behind with annual capital growth of 24.7 per cent and a rise of 5 per cent in the last quarter of 2006 compared to 4.6 per cent for industrial during the quarter. "Though lagging marginally behind the industrial sector, this was the highest annual rise for retail capital values since 1998," according to JLL.
The office sector also performed strongly in the year gone by with its highest capital growth since 2000 of 21.8 per cent and a quarterly rise of 2.8 per cent during the last three months of 2006.
Rental values in the index increased by 5.7 per cent during 2006 and by 2.3 per cent in Q4 2006, with retail the best sectoral performer with an annual rise of 9.8 per cent and a quarterly increase of 5.2 per cent.
Office rents showed a strong recovery with a year-on-year change of plus 4 per cent at the end of 2006 compared to an annual rise of plus 0.1 per cent at the end of 2005. Industrial rents grew by 3 per cent during the year and by 0.4 per cent in Q4 2006.
JLL said that the initial yield in the last quarter of 2006 for the retail sector of 2.8 per cent was the lowest recorded in the index during the last 15 years. The average yield for all properties in the index now stands at 3.7 per cent.
