The significant drop in overall returns for the commercial property market in the second quarter has been confirmed by a major index released today. The SCS/ IPD Index for the three months to the end of June recorded a return of 2.2 per cent compared with 3.3 per cent in the first three months of the year.

With the easing of the growth rate, there is now a widespread recognition that the days of annual returns of up to 38 per cent (as happened in 1998) are well and truly over.

Nevertheless, the SCS/IPD index suggests that, even if the lower returns of 5.6 per cent for the first six months continue for the remainder of the year, commercial property will still show a return of more than 10 per cent for 2001.

The 2.2 per cent recorded in the second quarter was marginally higher than the 1.8 per cent reported in an earlier index by Jones Lang LaSalle. Both agree that the quarterly returns were the lowest since 1993. The Jones Lang study is based on 34 properties valued at £229 million (€291 million) while the SCS/ IPD index looked at the performance of 12 institutional portfolios with an overall value of £2.8 billion.

Measured annually, the market returns monitored by SCS/IPD remain in excess of 20 per cent. Averaged over the period, yields have begun to drift out but rents have risen by 16.3 per cent, contributing to a 14.8 per cent uplift in capital values.

However, rental value growth in the index, which showed signs of moderating in the first quarter of the year, measured just 1.6 per cent over the three months to June. Coupled with this, yields rose a further 0.04 points, restricting capital value growth to a relatively modest 1 per cent.

Over the first six months of this year rental value growth has slowed to 4.1 per cent, compared with an 11.7 per cent rate of increase during the corresponding period in 2000. Furthermore, yields have now risen for the fourth quarter in succession.