Overall returns from commercial property remain buoyant and are likely to reach at least 26 per cent for the full calendar year. This will be 4 per cent below the figure for 1999. The London-based Investment Property Databank (IPD) reports today that the market produced a return of 6 per cent for the third quarter of the year compared with 6.8 per cent in the previous three months. Capital values were up 4.7 per cent over the most recent quarter and 22.2 per cent for the year.
This year's strong performance means commercial property has now been on a roll for eight years. In the last four years in particular, the returns have been quite extraordinary: at least 26 per cent in 2000; 30 per cent in 1999; 39 per cent in 1998 and 25 per cent in 1997.
The debate now centres on whether commercial property is about to dip, like the residential market. The most obvious signs of change are new lending restrictions recently introduced by a banking sector very heavily exposed to the property market. Only the leading players or those with substantial deposits are getting bank approval to buy sites in Dublin city and suburbs. There is a marked reluctance to fund both housing and commercial land in outlying areas, as well as in the provinces.
Nevertheless, the investment market remains particularly strong with the overall turnover restricted only by the shortage of supply. Measured annually, Irish property continues to be the best performing asset class, despite a rally by equities from a summer slump to produce a return of 17.3 per cent in the third quarter. Over the 12 months to date, a property return of 28 per cent compares favourably with 23.4 per cent on equities and 3.7 per cent on gilts.
The IPD index shows rental value growth of 5 per cent, the strongest seen in any single quarter of the current market cycle. Despite this, the index return was down on the previous three months, mainly because property yields began to show signs of levelling out. Having fallen by 10 basis points in the first six months of the year, the all-property yield rose in the third quarter by one basis point. The aggregate yield finished September at 5.77 per cent.
Significantly, property returns slowed in all three sectors of the market during the September quarter by varying degrees. Retail and industrial returns were down 1.1 and 1.3 percentage points respectively on the previous three months. The office returns fared slightly better slowing by 0.7 of a percentage point. As such, the familiar ranking was maintained across the sectors, with offices strongest at 6.9 per cent, producing a 32.2 per cent return for the previous 12 months.
There was little evidence of yield movement in any of the sectors during the third quarter. Industrial yields fell by a mere 3 basis points, while the retail and office sectors both reported a modest rise. Most of the capital growth in the last quarter resulted from improved rental values. The superior performance of the office market was maintained by a 5.8 per cent increase in rental values, contributing to 5.7 per cent capital growth.
The IPD survey shows retail holdings made relatively steady progress during the quarter, with values rising by 3.1 per cent. Rental growth in this sector, which had accelerated by 3.7 per cent, was partly offset by a slight upturn in the yield.
Capital values in the industrial market, by comparison, were up by 3.4 per cent mainly because of a 3.2 per cent increase in rental values.
The superior performance of offices in the current quarter is particularly evident at a segment level. "Central" and "rest of Dublin" offices earned returns of 7.2 per cent and 5.9 per cent, respectively. By comparison, the best performer in the retail market, shops in the "rest of Dublin", achieved a 4.7 per cent return.
