Irish commercial property returns turned positive for the first time in two years in the first quarter of 2010 (Q1), with a modest 0.4% delivered in the first quarter of 2010, according to the SCS/ IPD Ireland Quarterly Property Index. Another report published Monday shows that Dublin has Europe's highest office vacancy rate at 21.9%. The commercial property sector is down -56.3% from the market peak.

The return to positive property performance was driven by the shallowest quarterly capital depreciation, at -1.8%, since the Irish market turned in the final quarter of 2007. The tail-off in capital depreciation reflects a positive yield impact, at 80 basis points, while rental pressure eased to its lowest quarterly decline since this time last year, at -3.3%. All property initial yields expanded by a fractional three basis points to 8.2%. Since the market peak in Q3 2007, Irish commercial property has now fallen by -56.3%.

Within the main retail segments in Q1, there was a significant quarter-on-quarter improvement in Henry and Mary Street, with capital depreciation easing from -6.9% in Q4 last year to -1.3% last quarter, while rental pressure softened from -10.5% to just -0.3%, over the same period.

By comparison, Grafton Street delivered an equal -1.3% capital depreciation in Q1, reflecting a shallower 160 basis point (1.6%) deceleration, while rental value falls eased by 260 basis points to -1.0%.

Within the office sector, the dominant central Dublin market delivered -2.2% capital growth, driven by the strongest positive yield impact among all segments, at 1.4%, reflecting improving sentiment and aided by a 300 basis points improvement in rental pressure quarter-on-quarter, at -4.8%.

Sasha Thomas, Service Manager for Ireland at IPD, said: "The return to positive quarterly property performance in the first quarter is the first step on the road to recovery for the Irish market. For two consecutive quarters both rental value growth and yield pressure have eased, which is an encouraging sign for investors.

SCS / IPD Ireland Quarterly Property Index

Marie Hunt of CB Richard Ellis Ireland commented: "Tying in with our assertion that activity has picked up in many sectors of the Irish commercial property market in recent months, we received confirmation this afternoon that the IPD index, the official indicator of returns in the commercial property sector, showed that total returns in the Irish market actually increased marginally by 0.4% in Q1 2010. Albeit a marginal increase, this is the first positive return in the Irish commercial property sector in over two years confirming that the worst of the downturn witnessed since the final quarter of 2007 is now firmly behind us.

These figures confirm that average commercial property values in the Irish market deteriorated by a total of more than 56% from peak, with most of this decline in this cycle a result of rising property yields. Interestingly, the UK market, first began to witness a recovery in August 2007 following 24 months of negative returns and with today’s confirmation of a recovery in the Irish market, it is now apparent that the downturn in the Irish market, lasted the same length of time as that experienced in the UK. This proves that the downturn experienced in the UK and Irish markets in the most recent cycle, albeit the most significant correction ever experienced due to its links to an unprecedented global banking crisis, corrected much quicker than in historic property crashes. Coupled with improving occupier sentiment and more positive economic indicators emerging in recent weeks, today’s IPD results are encouraging.”

Two reports published by Jones Lang LaSalle on Monday also provide positive signs of recovery from the global economic crisis, with the European office market and the Dublin office market showing signs of growth in recent months. Dublin, Barcelona and Dusseldorf show the sharpest improvement across the European cities surveyed, though these markets rose from very low levels.

Take-up in the Dublin office market increased 143% year on year in the period to March 2010 compared with a deep trough, growing by 38% in the first three months of this year, when a total of 268,975 sq ft of office space was let, 44% of it in suburban locations. According to Jones Lang LaSalle Ireland Director, Deirdre Costello, 39% of transactions were by international companies such as Dun & Bradstreet, Marcus Evans, Maxim, and William Grant & Sons which are setting up base in Ireland for the first time. Almost 42% of office deals in Q1 2010 were as a result of Irish and international companies expanding their existing operations.

Dublin Office Market

“Both trends provide positive signals for the overall recovery of the Dublin office market while also showing that the market is not overly dependent on foreign direct investment.

“In terms of supply, the Dublin 2 area has the lowest office vacancy rate in the city (15%). Prime headline rents in the city centre are showing signs of bottoming out and currently range from €32 to €38 per sq ft. In terms of future activity, major corporates such as Ebay, Yahoo, Google, AOL, LinkedIn, Bord Gais, ESB and the Central Bank remain actively seeking accommodation. Elsewhere, sentiment continues to be buoyed by news of companies such as Kerry Foods, OSG Group and Audi either acquiring new accommodation or expanding their existing operations here.”

The second report, Jones Lang LaSalle’s Q1 2010 European Office Clock shows that business sentiment across Europe has now improved over four consecutive quarters. According to John Moran, Managing Director, Jones Lang LaSalle Dublin, a time lag still remains between the wider economy and occupier markets, although positive signals have increased.

Jones Lang LaSalle’s European Office Clock reveals that prime rents and incentives continued to stabilise in the majority of European markets in Q1 2010, with the European Prime Office Rental index, based on the weighted performance of 24 markets, increasing 1.2% quarter on quarter, the first increase since Q2 2008. Prime office rents, however, remain 5.0% below the level seen one year ago. The biggest rise in rents this quarter was seen in Moscow (14%) and the City of London (6%). Achieved rents in Brussels also indicated 17% growth but this was due to one exceptional deal in the Leopold district and not indicative of the wider market. This quarter’s office clock not only reflects the range of rental conditions and prospects, but also shows how all markets are moving through “rents bottoming out” and toward growth. This quarter, the City of London entered the “rental growth accelerating” quadrant and several markets were at, or approaching, 6 o’clock.

European Office Clock

The agency says signs of economic recovery are beginning to feed through into office demand, but tenants remain cautious and cost sensitive. In the absence of strong economic growth, current market activity remains driven by lease events, portfolio churn and corporate activity including office consolidation and the realisation of space efficiencies rather than expansionary plans. Take-up for Q1 fell slightly to 2.4 million sq m across Europe, a fall of 9% on the previous quarter although it is worth remembering that the final quarter is usually the strongest. This decline was driven mainly by Western Europe (-12%) whereas take-up increased slightly in the CEE region (+6%). Despite this, take-up for Q1 2010 was 38% up on Q1 2009 with both Western Europe and CEE (Central and Eastern Europe) seeing annual increases. Overall, nearly half of the 24 index markets showed an increase in demand over the year, with Dusseldorf, Barcelona and Dublin showing the sharpest improvement though these markets rose from very low levels.

On the office supply side, completions are beginning to decline from the cyclical high of 2009. In Q1 2010, some 1.2 million sq m of office space completed and in London shortages for certain product types and sizes is already being experienced amidst falling vacancy rates. Since the credit crunch a lack of speculative finance, a lack of developer confidence and uneconomic development appraisals has combined to prevent new speculative commencements. Across most EMEA (Europe, Middle East, Africa) markets developers are still subject to the above conditions and so remain hesitant to commit to new space. The report says this will help to ease the imbalance between supply and demand and may even create a “supply gap” of new space in the medium term.

With declining completions and the first signs of improving demand, the European vacancy rate remained stable over the quarter at 10.2% - the first quarter of stability since Q2 2008 (7.1%). This was driven by Western Europe, where the aggregated vacancy rate remained at 9.7% while in the CEE markets vacancy increased modestly, from 16.1% to 16.4%. Over the quarter, vacancy levels decreased in 7 of the 24 index markets led by London. The highest quarterly increase in vacancy was registered in The Hague (+160 bps), Luxembourg (+110bps) and Barcelona (+90bps); however these were exceptions. There remains a significant spread across Europe with the highest vacancy rate in Dublin (21.9%) and the lowest rate at 6.4% in Luxembourg.

Jones Lang LaSalle says looking forward, the differentials in the supply dynamic, GDP and employment growth across the EMEA region will accentuate differences in recovery. This will determine the window of opportunity for occupiers seeking to secure prime space or larger floor plates at competitive prices. Tightening supply pipelines will start to stabilise conditions in many markets but, as the office clock shows, risks remain prevalent in others.