Irish commercial property values, which fell by more than 65% since the recession, rose by 0.3% during the third quarter of 2013 according to the IPD/SCSI Ireland Quarterly Property Index. The first capital value rise seen in six years was due to improving sentiment around the value of discounted property assets, as well as gradually increasing occupier demand. After 23 quarters of capital decline, the latest figures also show the highest quarterly total return for Irish commercial real estate since September 2007, at 2.6%.
However, the index results mask a far from standard recovery despite positive topline figures. Demand for offices in central Dublin, from both investors and tenants, are driving returns, while recovery across the retail and industrial sectors is slower.
Office total returns were 3.2% during Q3, driven by rising capital values of 0.9%, but returns for industrial and retail lagged at 2.3% and 1.7% respectively. Both sectors continued to see falling capital values of 0.5% and 0.3%, though these represent a substantial easing in their rate of decline.
Discounted property assets have been on the radar of bargain hunting private equity investors for almost two years now, while the launch of Ireland’s first real estate investment trust (REIT) in June 2013 cemented this positive outlook.
High-income yields have been the key driver for investors returning to the market. All property annual income returns of 9.7% to September 2013, are the highest measured globally by IPD, and are over a third higher than that of the 6.0% offered on UK property.
Annual income returns were 10.2% for offices, 12.2% for industrials and 8.5% for retail units. IPD said that provided tenants can be secured, these are tempting targets for investors willing to take on additional risk.
Occupier demand remains crucial for the recovery of the sectors. Rental values declined by 0.4% overall, almost entirely due to lacklustre demand in the retail sector, which saw falls of 1.9% despite a notable, but muted, uptick in consumer spending and sentiment.
Comparatively, rents rose by 0.5% for offices, bolstering the confidence of investors looking to secure income returns, while in central Dublin, office rents increased by 1.0%. Promisingly, occupier demand is also rising from tenants for industrial assets, which saw rental values increase by 0.3%.
Annual returns to September 2013 for all property now amounts to 7.3%, higher than those in the UK (6.5% according to the IPD UK Monthly Property Index), or indeed much of Europe, essentially due to these higher income returns. Comparatively, Irish bonds and equities have returned 14.0% and 24.6% over the same period (JP Morgan 7-10yr/MSCI Ireland).
Ray Hanley, chairman of the Valuation Professional Group of the Society of Chartered Surveyors Ireland (SCSI), said, “Further encouraging reports over the state of Irish economy are giving property investors, both at home and abroad, confidence about the promising recovery in the property market.”
Phil Tily, executive director & head of UK and Ireland, IPD, said, “Growth is creeping back to Ireland’s property market after six very difficult years, but they are six years that have also seen an enormous effort on the part of government and the property industry to reinstate confidence in the market.
“The rewards of lowering stamp duty, the ridding of rent review legislation, maintaining corporation tax levels, and successfully implementing austerity measures are now starting to pay off, and hopefully what is emerging is a fitter, leaner and more sustainable property sector.”
Colm Lauder, associate & consultant for UK and Ireland, IPD, added, “Occupier demand remains a critical component of growth, and has driven the recovery in the office sector and improving returns for industrial units.
“However, neither of these sectors is wholly affected by weak domestic demand, being driven largely by international corporate tenants and exports. Last weeks seventh austerity budget made it clear that there is still a long way to go before domestic spending will significantly increase, which may have some effect on the recovery of the retail sector.”
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