Falling rents have led to a decline in commercial property values in the second quarter of 2010 – and they are down 58% from the 2007 peak, writes JACK FAGAN
CAPITAL values in the commercial property sector are slipping again as a direct result of falling rents. The latest Irish Property Index (IPI) from Jones Lang La Salle shows that capital values declined by 4.7 per cent in the three months up to the end of June and by 58 per cent since they peaked in the third quarter of 2007.
The fall in capital values so far this year has now reached 6.7 per cent. Dr Clare Eriksson, head of research at the estate agency, said the decline in capital values had slowed considerably during the previous three quarters but were placed under downward pressure in Q2 by falling rental values for all three sectors – offices, retail and industrial.
The industrial market recorded the steepest decline in values in Q2 by 6.1 per cent and, according to the index, is not showing any signs of stabilising. Office values fell by 4.8 per cent in Q2 and by 18.2 per cent in the 12 months to the end of June.
The retail sector is now faring best with a quarterly decline of 3.9 per cent and a slippage of 13.5 per cent over the past 12 months. The overall returns index fell by 2.3 per cent in Q2, reflecting a slowdown in the recovery of the property market. The previous quarter had shown a marginal improvement of 0.1 per cent. Dr Eriksson says that despite this setback, the performance of the commercial property market during the first six months of the year was more positive, with a -2.2 per cent movement – the strongest December to June returns since June 2007.
Rental values in the index dropped by 11.8 per cent in Q2 and by 15.6 per cent in the six months to June as evidence of new lettings came through. As with the capital values, the industrial sector had the poorest quarterly rental value performance in Q2 of -21.5 per cent compared to 11.3 per cent for retail and -9.8 per cent for offices.
In the six months to June, index rental values have dropped by 25.5 per cent for industrial property while the falls for offices and retail have been 16.1 per cent and 11.9 per cent, respectively.
Ironically, real income levels in the index portfolio improved with a quarterly increase of 0.5 per cent. This positive movement represents renewed rental flow returning to one of the properties included in the index rather than income levels increasing across the portfolio.
“The main positive for the commercial property market going forward is the stabilisation of property yields,” says Dr Eriksson.
