Irish commercial property capital values continued to nosedive in the final quarter of 2008, eclipsing the previous quarter’s record fall by tumbling -17.7%. All Property capital values slid -37.2% over the full calendar year, while total returns on investment in Irish commercial property were -34.2%, according to the SCS / IPD Irish Quarterly Property Index. More than 5 years of UK capital growth has been eroded in 18 months, says IPD, in another report today.
The most pronounced value falls, for the fourth consecutive quarter, came in the Retail sector which fell -20.8%. The root cause of the Retail sector’s capital value falls was the pronounced yield impact, at -45.0% over the year, counteracting the growth in rental values, which rose to 3.4% over 2008 compared to 5.7% the previous year. All Property rental value movement remained flat over the final quarter and just 2.0% for the year.
In Offices, capital values fell -15.8% for the quarter and -34.4% for the year, while falls in Industrials were slight shallower over Q4, at -15.1%, and -26.2% for the full 12 months. Marginal insulation was provided in income return which, at the All Property level, returned 1.4% and 4.6% over the year.
The scale of the final two quarter losses of 2008 has pushed down the three-year annualised total returns to -6.1% for Retail; -0.9% for Offices; 2.5% for Industrial while returns of -2.8% were realised on an All Property basis.
IPD Head of Indices Angela Sheahan said:“The market has been braced for further bad news from the final quarter of 2008 so the further steep falls will come as little surprise. However, to surpass the Q3 record capital value falls is another reminder of the extent to which the Irish market was over-priced prior to last summer.”
More than five years of UK capital growth has been eroded in 18 months, says IPD
The All Property UK commercial property capital values fell by a record -14.4% over the fourth quarter of last year, giving an annual decline of -26.4%, according to the IPD UK Quarterly Property Index Q4 2008 published today.
Meanwhile, total returns fell by -13.0% over the final quarter and by -22.1% over the full year. In nominal terms, these figures represent the biggest annual fall in capital values and lowest returns for UK commercial property investment on record. Capital values have now fallen -34.3% since the onset of the property market re-pricing cycle began in July 2007.
Fourth quarter and annual capital growth figures for the three principal sectors were -15.1% and -27.0% for Retail; -14.1% and -26.5% for Offices and; -13.7% and -25.7% for Industrials.
The story over the first seven years of the century is one of two parts. Over the five and a half years from 2002 to mid 2007, equivalent yields fell and capital values rose every quarter. In the 18 months to the end of 2008, equivalent yields have risen every quarter while capital values have fallen. Overall, the entire gains made over the boom cycle have been eroded in 18 months of successive falls, with capital values now broadly in line with December 2001 levels.
Evidence of the ‘classic’ property cycle – driven by swings in rental peaks and troughs – has not been present over 2008. There has been an extremely mild rental growth cycle; All Property rental values fell by -1.4% over Q4 and by -1.1% over 2008. The exception is of course in City and West End London offices, which fell by -3.9% and -8.4%, respectively over the fourth quarter alone.
In the case of West End offices, the significant falls may be partly be explained by the fact that top rents are supported by a narrow spectrum of occupiers – hedge funds, commercial property derivatives market, and the most authoritative measures of real estate returns worldwide.
The IPD UK Quarterly Property Index measures returns to direct investment in UK commercial property. It shows total return on capital employed in market standing investments (i.e. properties held from one monthly valuation to the next) but excludes any properties bought, sold, under development, or subject to major refurbishment in the course of the month.
The IPD UK Quarterly Property Index is compiled from valuation and management records for individual buildings in complete portfolios, collected direct from investors by IPD. All valuations used in the IPD UK Quarterly Index are conducted by qualified valuers, independent of the property owners or managers, working to RICS (Royal Institution of Chartered Surveyors) guidelines. The quarterly results are chain-linked into a continuous, time-weighted, index series.
The IPD Quarterly Index began in Q1 2001 and now has a history of 32 quarters. The sample at the end of Q4 2008 was £90 billion — nearly three times that of the IPD Monthly Index.
