Despite difficult market conditions two reports out today put overall returns from commercial property in 2007 at 8.8 per cent and 9.9 per cent, writes Jack Fagan

The Irish commercial property market has yet to see a fall in values despite the severe setbacks in Britain and other countries as a result of fears of a recession and turmoil in international financial markets.

The Irish Property Index produced by Jones Lang LaSalle and published today shows that overall returns in 2007 came to 8.8 per cent. A broader study by the London-based Investment Property Databank (IPD) also out today calculates that total returns were even higher at 9.9 per cent.

While the two findings will provide some comfort for an apprehensive commercial property industry, they are a long way lower than the 27.2 per cent growth reported by IPD in 2006.

However, commercial property last year easily outperformed both bonds and equities with returns of 0.5 per cent and minus 24.5 per cent, respectively.

Though many overseas property markets have been decimated in recent weeks, the considerable wealth accumulated by Irish investors has meant that they are under no pressure to sell at reduced values.

IPD research manager Angela Sheahan says the uncertainty has meant that there has been a decline in the number of transactions and therefore a slowdown in the returns towards the end of 2007.

Margaret Fleming, director of capital markets for Jones Lang, said that as always the pace of adjustment had been slower here than in the UK.

There was likely to be some further adjustment in yields and values, with poorer real estate suffering most.

"That said, however, even modest rental growth takes some of the pain out of it."

She also said it would be naieve to think that all value adjustment was complete.

"Further correction may well be necessary for liquidity but the recent UBS report predicting falls of up to 30 per cent across the board seems somewhat dramatic. UBS are right to predict some falls to come but the sweeping nature of their conclusions appears to be quite overdone."

There are already indications that the number of investment deals in the Dublin market could be down significantly this year as owners bide their time until the financial markets return to some degree of normality.

Relatively few owners are under pressure to sell because of the huge capital appreciation-not to mention the handsome returns- over the past decade.

Owners of development sites, particularly in the Dublin suburbs and provincial cities and towns, are increasingly acknowledging that many of them are overvalued by 20 to 30 per cent.

There are also signs that a number of ambitious retail developments may be delayed because of reports that spending is slipping fast due to the economic slowdown.

The Jones Lang LaSalle and the IPD indexes underline the dramatic slowdown in the final three months of 2007 after a relatively strong performance in the earlier months.

Jones Lang LaSalle reports that returns slipped from 2.9 per cent in the third quarter to 0.1 per cent by year end while IPD conclude that the slippage in the same two quarters was from 3.3 per cent to 1 per cent.

Dr Clare Eriksson, head of research at Jones Lang LaSalle, says that while capital values in their index rose by 4.7 per cent in 2007, they fell back by 0.8 per cent in the final quarter.

The strongest contributor to capital growth was the industrial sector where values increased during the year by 6.4 per cent.

The office and retail sectors finished the year with capital values up 4.5 per cent. Values for both offices and retail moved into negative territory in the final quarter, dropping by 1.4 per cent and 0.4 per cent.

In the slowdown during the last three months of 2007, IPD estimated that the retail sector did best with capital values rising by 0.8 per cent compared to a fall in office and industrial values by -0.6 and -0.3 per cent.

The growth in retail values was due to higher rents as well as less significant outward movement in yields.