Ireland is once again confirmed as Europe’s hardest hit commercial property market, with a two-year peak-to-trough capital depreciation of -48.6%, according to the SCS / IPD Irish Quarterly Property Index for Q2 2009. The vast bulk of this Irish decline has come in the last year, with the 12-month change in capital growth to the end of June now -42.7%.

However, the pace of capital decline, at -7.8% over the second quarter, has softened for the second consecutive three-month period, owing to an easing in yield expansion, with initial yield standing at 7.0% at end June. At sector level, the quarterly capital value declines were led by Retail, at -9.8%, followed by Offices and Industrial at -6.8% and -5.0%, respectively. Income returns rose marginally to 1.8%.

Over the full eight quarters of the downturn, hardest hit corners of the market have been the Retail locations, particularly Grafton Street, with a capital fall of -59.9%, and Henry and Mary Street, which fell -58.3%. By comparison, the wider Retail market slid -53.2%, while Offices and Industrial lost -46.1% and -40.2%, respectively.

Similar to the experience in the UK, the dominant pressure on capital values is now declining rental levels, as the chart above illustrates. Over the initial 18 months to the end of 2008, rental value growth, which measures underlying movements in estimated rental levels, rose across all sectors. However, since the turn of the year, negative rental trends have set in, with the pace quickening from -3.2% in the first quarter to -6.6% over the three months to the end of June 2009.

At segment level, again Grafton Street has seen the greatest fall in rental values, by -9.6% over the second quarter, while falls in Henry and Mary Street were slightly shallower, at -5.9%. Over the two-year property market downturn, all the rental growth accrued by the two retail districts over the 18 months to the end of 2008 has been eroded in the last two quarters.

Angela Sheahan, Head of Indices at London-based IPD said: "The increase in yields in the last 18 months has been huge; equivalent yields at the end of 2007 were 4.0% have increased to 7.7% at the end of June. While the rate of increase in yields slowed in Q2, the rate of decline in rental values accelerated. This coupled with increased vacancies, particularly in the industrial sector indicates that the property sector is Ireland is not out of the woods yet."

The IPD the SCS / IPD Irish Quarterly Property Index is based on a sample of 314 properties from 12 portfolios covering €2.9bn at the end of June 2009.