Property Returns:The all-property total return for the 12 months to September 2007 in the domestic market was 15.2 per cent, compared to 30.4 per cent for the same period to September 2006, writes Angela Sheahan

After a strong performance throughout 2005 and 2006, the Irish property market has seen total returns slow in the first three quarters of 2007.

The all-property total return for the 12 months to September 2007 was 15.2 per cent, compared to 30.4 per cent for the same period to September 2006. However, the total return on commercial property outstripped both bonds and equities which both saw negative returns in the year to September 2007.

The return on Irish property was also considerably stronger than the return on UK property over the same period, at just 7.3 per cent. The UK annual return was brought down by a negative return in the third quarter of -1.1 per cent. This shows a divergence between the two countries which historically have had highly correlated returns.

The downturn in UK returns was due to a correction in pricing causing yields to increase. The average yield on UK property at the end of September 2007 was 5.5 per cent compared to just 4 per cent on Irish property.

The total return was made up of 4 per cent income return and a 10.9 per cent increase in values. Furthermore, the increase in values was driven by a 6.1 per cent increase in market rents and a fall in yields adding 5.5 per cent to capital values.

The fall in yields indicates good market sentiment, investors have accepted less rental income for the price in expectation of future growth.

Over the last 12 months industrial properties have had the strongest returns, followed by offices.

Retail property experienced the worst performance. However, the range in 12-month returns between the sectors has been very small in 2007, standing at just 60 basis points in Q3 2007 compared to 350 basis points at end of September 2006, when offices were outperforming and industrials had the poorest returns.

In the year to September 2007, the strong performance in industrial property was down to investor sentiment pushing yields down.

The decline in yields lifted values by 9.1 per cent; industrials had the lowest vacancy rate of the three sectors at the end of September at just 3.6 per cent of rental value in vacant space. This shows strong occupier demand, a positive sign for future rental growth.

Of the three sectors, retail saw the strongest improvement in rents in the year to September 2007 with rents rising by 7.6 per cent. Retail yields, which were already the lowest of the three sectors, saw less yield compression in the year to September 2007, but the downward movement in yields still added 4.6 per cent to capital values. Average retail yields stood at just 3.4 per cent at the end of September 2007.

Offices, which saw rents fall in 2004, have seen strong rental growth in the year to September 2007, with a growth in rental values of 6.3 per cent. Downward yield movements also added 5.2 per cent to capital values. The rental growth in office properties means that a large proportion of properties have reversionary rents, where the growth in rental values will be realised at rent review or lease expiry.

In 2006, Irish returns were the strongest of all countries measured by IPD. With our UK neighbours seeing negative returns in recent months while Irish returns remain robust, Irish property could once again be a top performer in 2007.

Angela Sheahan is research manager with IPD, which is a global provider of performance measurement for the property industry. All UK figures in this article are taken from the IPD UK Monthly Index. All data for Ireland is taken from the IPD Irish Quarterly Index