More than a quarter of Irish commercial property income is over-rented (space that is let at a rent above its ERV (estimated market rental value), research by IPD, the London-based property index firm, shows. Sweeping declines in rental values has led to widespread over-renting across all sectors, reaching 26.3% by Q2 2010, according to the SCS (Society of Chartered Surveyors)/IPD Irish Quarterly Index.

Speaking at the IPD/SCS Quarterly Briefing, IPD research analyst James Scott, said: “Significant falls in net income growth have not followed on from the deep rental re-pricing, as would be typical. Instead income streams have remained robust due to the nature of long Irish leases and the still operating upwards-only rent review structure.” The rental structure status quo provides a cushioning effect on short-to-medium cashflows of existing leases. Given the recent changes in legislation abolishing the upward-only rent review on leases signed after the end of February, Scott added, new leases from 2010 will not offer this downside risk protection.

Scott added: “In future, over-rented tenancies at review will be reduced to market level.”

The IPD/SCS Quarterly Briefing was attended by valuers and investors at Dublin’s Conrad Hotel last Friday. Society of Chartered Surveyors President, Peter Stapleton - - who chaired the event - - told delegates: “There have been seismic changes to the market which have affected all our lives and businesses. So we need detailed information to hand to make informed decisions about the assets we manage for our clients no matter what part of the market we are in.”

He continued that the benefits of National Asset Management Agency (NAMA) strategy, which was set up by the Irish Government last year to help restore bank lending by acquiring underperforming commercial property loans from domestic banks, would soon become visible.

Stapleton added: “I would expect a small supply of assets to be delivered to the market before Christmas and the supply should gather momentum into 2011/2012, but on a manageable basis so as to avoid over supply. The sooner this process starts the better because in itself it will create a degree of confidence."

NAMA manages commercial property loans with an initial book value estimate of €77bn and include properties in various jurisdictions worldwide.

Phil Tily, Managing Director of IPD UK and Ireland, said: “The effect that any assets released by NAMA might have on the market depends on a number of economic and property variables as well as the scale of investor interest and availability of the banks to lend to those who need funding.”

At the Irish Briefing, Scott said the falls in rental values are the second worst quarterly falls in rental values on record, at -7.5%. “The causes of these falls are a combination of falling consumer spending, rising unemployment, prompting corporate downsizing and increasing vacancy rates. All of these pressures on rental  values are, in part, responsible for the underperformance of the market.”

Yield impact is no longer driving returns as it did in 2008, and for the last three quarters has hovered around the zero line. The twin influences of rents and yield movements combined to deliver a negative second quarter capital growth at -3.5%.

With income return - -  currently at the highest level experienced in the history of the quarterly index at 2.2%, which is being pushed higher by continued falls in capital values - - the total return for Q2 2010 was -1.4%.