Market Report Capital growth of nearly 22 per cent is the main factor behind the strong performance of the commercial property market, writes Jack Fagan
The quiet confidence still so evident in the commercial property market, despite the misgivings about the residential sector, has been greatly bolstered by the exceptionally strong results last year.
This week the London-based IPD calculated that overall results for 2006 were up by 27.2 per cent, made up of a 4.4 per cent income return and a thumping 21.9 per cent capital growth for the year.
This comes a week after the Irish index from Jones Lang LaSalle showed that it was the best performing year since 1999, with overall returns up by 28.5 per cent. The fact that the differential between the two indexes is only 1.3 per cent is somewhat surprising given that the IPD index is based on institutionally owned property worth €5.8 billion while the Jones Lang LaSalle study measures only 32 properties with an overall value of €615 million.
Ironically, while both indexes are based solely on institutional investments, the biggest players in the commercial market over the past decade or so have not been the funds but rather investment syndicates and private investors who have been able to move more swiftly to buy virtually anything coming on the market, including investments such as the new Eircom headquarters which traditionally went to the institutions.
Inevitably, future indexes will have to reflect the changing pattern of ownership to give a more accurate measurement of what is happening in the market. With the institutions no longer the dominant players, the indexes of the future will have to go beyond the safe ground of the institutions and measure the investment performances of Quinlan Private, Warren, Anglo-Irish Bank, Davys, and individuals like Sean Quinn, John Byrne, Paddy McKillen, Bernard McNamara, Michael Cotter, Joe O'Reilly and others.
IPD reports that the strong returns from property in the final three months of 2006 could not match that of equities at 14.9 per cent but were ahead of bonds which fell by 1.1 per cent. Over the year as a whole, equities also topped the hierarchy, returning 30.7 per cent compared to property's 27.2 per cent with bonds lagging well behind and dropping 1.8 per cent.
Property capital values continued to climb, rising by 4.8 per cent in the three months to December last. Rental values also grew, rising by 2.1 per cent in the final quarter, an acceleration from the 1.1 per cent growth in the previous three months. Meanwhile yields continued to decline, dropping to a record low of 4.1 per cent. The impact of this fall in yields was to add 3 per cent to capital values.
For the second quarter running retail was the best performing sector with a total return of 6.9 per cent compared to 6.4 per cent from industrials and 4.7 per cent from offices. The out-performance from the retail sector was due to strong rental growth, 3.3 per cent, as well as yields falling to 3.4 per cent. The strongest returns for the quarter were seen in Henry/Mary Street where returns were 10.3 per cent - significantly outpacing the rest of Dublin.
The IPD index showed that offices registered rental growth of 1.7 per cent for the quarter, while further inward yield movements added 2.2 per cent to capital growth. Returns were once again strongest in Dublin 1 which outpaced the rest of Dublin due to more favourable movements in yields. Industrial returns were an improvement on the last quarter, outperforming offices but not quite matching retail. The industrial capital growth of 4.9 per cent was a combination of rental growth of 0.5 per cent and an inward movement in yields which added an equivalent of 4.3 per cent to capital values.
Angela Sheahan of IPD described the Irish returns as "another stunning year for Irish property. We've seen further acceleration in rental value growth as well as further yield compression."
