PropertyReturnsStrong returns in the office sector are behind improved conditions in the market in the first quarter of 2005. Jack Fagan reports

The Irish property market has made a relatively strong start to the year.

Total returns of 4.5 per cent in the first three months of the year in the SCS/IPD index were fractionally better than the 4.4 per cent reported in the closing quarter of 2004.

Measured annually, property returns climbed to 14.2 per cent, the net product of a 5.7 per cent income return and an 8.1 per cent capital appreciation.

The continuing improvements in the fortunes of the market comes at a time of intense competition between institutions and private investors for pre-funding opportunities and the very limited supply of retail and office investments going for sale.

Investors are continuing to concentrate mainly on the UK despite warnings that market fundamentals do not justify inflated values on the London property market.

The 14.2 per cent returns for the 12 months up to the end of March compared with a figure of 11.5 per cent for the 2004 calendar year.

A 4.5 per cent first quarter return for property compares favourably with that of other asset classes.

Bonds fell back to 1.6 per cent while the equity market began the year with a negative return of minus 2.8 per cent.

Capital values continued where they left off last year, rising by a further 3 per cent in the first three months of 2005.

Rental values gained further ground but their level of improvement slowed to 0.7 per cent.

Meanwhile yields fell to a record low of 5.53 per cent, dropping more than 10 basis points, suggesting that confidence within the market built up through 2004 has carried forward into this year.

Phil Tiley of the London-based IPD says that improved conditions in the property market in the first quarter can be traced entirely to a degree of strengthening within the office sector, where returns rose to 4.5 per cent.

Rental values in this sector now appear to have bottomed out, as they remained unchanged over the quarter. That said, most of the gain in office returns was yield driven.

Average office equivalent yields dropped below the 6 per cent mark over the three-month period, resulting in a 2.9 per cent improvement in capital values, which, incidentally, is the largest gain reported by this sector since December 2000.

The Irish property market is still led by healthy returns in the retail area, where capital values rose a further 3.9 per cent in the first three months.

A 2.4 per cent rise in retail rental values was a notable improvement on the opening three months of 2004.

Confidence in this sector remains high, as reflected in the equivalent yield which edged below 4.5 per cent.

IPD's quarterly review shows how within the retail market, Grafton Street continues to deliver one of the higher rates of return, faring better than Henry Street and Mary Street.

Retail warehouses also made good progress this quarter with a return of 6.7 per cent.

Industrial returns were pegged back to 2.4 per cent, down from 2.8 per cent recorded in the final quarter of 2004. Industrial capital values rose by a relatively modest 0.8 per cent as both yields and rental values remained largely unchanged for the period.