MSCI, the London-based index firm, on Wednesday reported that returns from Irish commercial property continued to rise in the third quarter of 2014, to reach 11.0%, their highest level since the IPD/SCSI Ireland Quarterly Property Index* began in 1995. This return substantially exceeded the 8.5% return recorded for Q2 2014. The 12-month return for Irish commercial property was at 36.6% to the end of September 2014 - the income or rental component of the return puts Ireland at a global high..
Just as having the most expensive agricultural land in the world benefits some but not the Irish economy, the small commercial stock coupled with foreign investment in a country that makes development land scarce, which triggers rises in rents, is also not good for the economy.
Brendan McDonagh, chief executive of NAMA, the Irish public agency for toxic property loans, told the Oireachtas Joint Committee on Finance, Public Expenditure and Reform on Wednesday: "Current projections indicate that the volume of direct investment activity will exceed €4bn in 2014 – the previous peak was €3.5bn in 2006. Italy by comparison had €4bn of commercial property transactions in 2013.
When all activity is taken into account, including loan sales, it is estimated that the aggregate of all Irish market transactions in 2014 will be of the order of €12bn. In addition to NAMA sales, that projection includes the loan sales activity of the Special Liquidators to IBRC and of a number of banks based in Ireland and it represents an exceptionally high level of investment activity in Irish assets by historical standards and even by reference to activity elsewhere in Europe."
2006 was the craziest year of the Irish property bubble.
MSCI said Wednesday that the Irish market recovery is now clearly going from strength to strength, with property values rising at an accelerating pace over the last five quarters. Capital growth of 9.2% for Q3 2014 was also the highest on record.
Offices continued to lead the market in Q3 2014, returning 12.0% in the last quarter alone, which implies nine consecutive quarters of market outperformance for the sector. Office values, nationally, have now risen by 33.2% over the last year, with values for all parts of the Dublin office market rising by more than a third in the same period.
However, in the last quarter Irish retail properties produced performance to rival offices, with returns reaching 10.3%; retail property values have now grown by 20.0% over the last year, after six years of decline. Industrials remain the one sector where growth remains muted, with values up by just 4.1% over the last 12 months.
As in the previous quarter, the high returns for Irish offices stemmed mainly from a strong occupier market, with rental value growth at 8.2% in Q3 2014 far higher than for the other main sectors. Rental growth is now well established as the driver of office returns, taking over from the re-pricing that drove the office market recovery in its early stages, when investor confidence began to return.
However, the growth in retail values, which accelerated to 8.5% over the last quarter, remained almost entirely dependent on strengthening investor demand. Retail market rental values did however pick up slightly in Q3 2014, rising by 1.0%, the first time that they have increased in 23 quarters. This reflects the gradual pick up in retail consumption, now long-anticipated given increasingly positive indicators for the Irish economy. Retail yield compression has added more than a quarter to values over the last year, reflecting investors’ increasing confidence in the sector.
Industrials have proved the weakest of the three main sectors in each of the last four quarters, with capital growth of 1.8% for Q3 2014 similar to that for Q2; this was however still the strongest quarterly growth since June 2007. As in the retail sector, industrial rental values showed some evidence of a pick-up in Q3 2014, with positive economic indicators finally starting to filter through into growing occupational demand.
Income return, at 8.0% p.a. for the Irish market, represents a diminishing share of the overall total return. Nevertheless, MSCI said this level of income return for Irish property is still the highest for any market measured by IPD globally. The high level of income is continuing to prove attractive to both domestic and foreign investors as general Irish economic conditions maintain their improving trend.
The 12-month return for Irish commercial property of 36.6% to the end of September 2014 was higher than that for the UK over the same period (19.7% according to the IPD UK Monthly Property Index). Irish real estate also outperformed Irish bonds, which returned 23.6% over the last 12 months (JP-Morgan 7-10 yr) and Irish equities, which returned 20.2% (MSCI Ireland). Colm Lauder, senior associate, MSCI, said, “The bounce-back of the Irish commercial property market has continued to impress in Q3 2014, with the year-on-year rise in values now exceeding 25%.
“However, it must be remembered that this follows six consecutive years of falling values and the recent strong growth is coming from a low base as values remain discounted by up to 50% from 2007 levels.
“Perhaps most encouragingly, the current rise in capital values is now being driven, more and more, by market rental growth, which has now returned to each of the main commercial property sectors as confidence in the Irish economy continues to strengthen.”
Ray Hanley, chairman of the Valuation Professional Group of the Society of Chartered Surveyors Ireland (SCSI), said, “The Dublin office market continues to lead the recovery in values underpinned by strong fundamentals, evidenced by both the reduction in vacancy rates and impressive rental growth. The recovery in retail values has been demonstrated through the level of demand for a number of large portfolios, interestingly containing assets in both Dublin and a wide spread of provincial locations, although yield contraction has been the principal driver of value growth in this sector to date.”
*Property sectors and number of properties in sample.
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