IRELAND’S commercial property market boom which generated the highest upturn in market values has since been turned upside down with the market suffering the sharpest capital depreciation across all global markets.

As this year draws to a close figures reported in the SCS/IPD Irish Index show that the levels of decline have begun to subside. The recent bailout will hopefully reinvigorate battered financial, consumer and investor confidence.

As things stand, to the end of the third quarter, property values have fallen by just shy of 60 per cent from their market peak – values have been falling continuously for the last three years, driven first by yields, then by an interplay of yields and rents, and more recently predominantly by just rental declines.

The nine months to the end of September 2010 has seen just -7.7 per cent of this compounded near -60 per cent fall in prices, caused by a -15.2 per cent decline in rents, while yields have fractionally contracted – but not by enough to materially affect the year-to-date capital growth.

The net effect of the -7.7 per cent capital growth, together with a 6.8 per cent income return, is a year-to-date total return of -1.3 per cent. If we assume that the third quarter total return, -0.3 per cent, is repeated in the final three months of the year, that would indicate an annual 2010 total return of -1.6 per cent. This would represent a vast improvement over the preceding two years when the SCS/IPD Irish Quarterly Index returned a low of -34.5 per cent in 2008 and -23.3 per cent in 2009.

There has been only marginal separation between the three main sectors of the market this year, offices proving slightly more resilient than the other two sectors. They are driven by different influences. In Industrials rents have fallen by -22.6 per cent in the nine months to end of September 2010, compared to -12.2 per cent in Retails.

Yields on the other hand have contracted most in Industrials, with no change in the year to date yields in Retails. Offices sit somewhere between the two with a -15.9 per cent fall in rents and a 30 basis point contraction in yields.

Looking ahead to next year, if timed right, it is entirely possible that the first tranche of properties under Nama’s control to come to the market could attract cash investors, help stimulate market confidence and help stabilise prices. On the flip side, high unemployment and economic weakness will force consumers to remain cautious which will hit the stricken retail sector. This year so far, values in the major retail districts, Henry/Mary Street and Grafton Street, have dropped -10.9 per cent and -5.9 per cent, respectively, driven mainly by falling rental expectations.

But overall it is the state of the Irish economy, and the pace at which consumer and financial confidence returns, which will profoundly dictate the performance trends of its commercial property market next year and beyond. The market needs the stable, gradual release of Nama-held stock, a secure long-term plan for its domestic banking market and a strategy to tackle unemployment to kick start consumer confidence.

Phil Tily is managing director UK and Ireland at IPD (Investment Property Databank)