MarketReports: Two new reports show that the commercial property market had a bumper year in 2005, writes Jack Fagan.

Overall returns from the commercial property market in 2005 were significantly higher than in the previous year, largely because of the strong performance by Dublin's Grafton Street and a recovery in the office market.

The Irish index compiled by SCS/IPD showed that the market delivered returns of 24.3 per cent last year while a similar study by Jones Lang LaSalle put the returns at an even more impressive 25.7 per cent.

The results are the best since 2000 and will serve to attract additional investment funds into a market that is already oversubscribed and has a huge weight of money waiting for new opportunities.

Compared with other asset classes, property was ahead of equities, which were up 21.7 per cent, and bonds, which rose by 8 per cent.

The 24.3 per cent return reported by the London-based IPD compares with a figure of 11.5 per cent in 2005 while the Jones Lang LaSalle year end growth of 25.7 per cent is a long way ahead of the 9.3 per cent recorded in 2005.

The agency also noted that the highest levels of growth for all sectors occurred in the last quarter of the year and may indicate a positive outlook for the market in 2006.

The IPD index showed that the surge in returns was almost totally reliant on an 18.1 per cent increase in capital values. Income return dropped to 5.3 per cent. Rental values grew by 3.4 per cent at the all property level, while a 74 basis point fall in the all property equivalent yield added 15.1 per cent to capital values.

The pattern of performance was similar to that seen in the latest figures available on the UK market. There, commercial property - measured by the IPD monthly index - delivered returns of 18.8 per cent in 2005.

Capital values rose by 12.2 per cent at the UK all property level in 2005; a 69 basis points fall in yields boosted capital values by 11.5 per cent which easily out-weighed a 2.6 per cent increase in rental values.

In common with Ireland, property outperformed bonds (at 7.4 per cent) but, unlike Ireland, UK equity returns (at 22 per cent) were superior to property returns.

Ireland and the UK also displayed similar patterns of performance at the sector level. In both countries, retail enjoyed another year of dominance, office returns improved considerably on lows in 2004 and industrial returns were once again solid, if unspectacular.

Irish retail returns climbed to 27.4 per cent in 2005, their best performance since 1998. Returns in Grafton Street at 30.3 per cent were higher than those on Henry and Mary streets at 19.1 per cent for the fourth year in succession.

Rental values rose by 15.9 per cent on Grafton Street compared to an increase of just 2.8 per cent on Henry and Mary streets.

Total returns on shopping centres and retail warehouses were more or less identical at 28.4 and 29 per cent, respectively.