Property Returns: Overall property returns in Ireland should be about 20 per cent this year and around 16.4 per cent in the UK, writes Dominic Smith

The overall trend in both the Irish and UK commercial property markets in 2005 has been a convergence of sector returns.

In the UK, total returns on retail, office and industrial for the first nine months of 2005 were tightly bunched at 11.8-12.6 per cent.

The spread of returns was wider in Ireland - in the first nine months of 2005 returns on retails, offices and industrials were 17.5 per cent, 13.5 per cent and 9 per cent respectively - but the gap between the best and worst-performing sector had narrowed to 8 per cent in September 2005 from 12 per cent in September 2003.

Both Ireland and the UK have seen retail deliver the highest total returns over the last three and five years - although five-year retail returns in Ireland, at 19.1 per cent per year, have comfortably exceeded retail returns in the UK, at 13.9 per cent per year - but the drivers of this out-performance have been different.

Traditionally, retail warehouse and shopping centre returns have exceeded those on the high street in the UK, while the reverse has been true in Ireland. Both markets have seen this pattern distorted in the first nine months of 2005; in the UK, yields on high street shops have fallen furthest, pushing total returns out to 12.6 per cent - ahead of 12.5 per cent on retail warehouses and 10.5 per cent on shopping centres.

Meanwhile in Ireland, retail warehouses were the star performer during 2004 and the first half of 2005, only to be pegged back in the third quarter of this year. Returns so far have been fairly even; retail warehouses and high street shops, at 18.7 per cent and 18.5 per cent per year respectively, have marginally out-performed shopping centres, at 15.9 per cent.

This year has seen a continuation of the recovery in the London office market, and the beginnings of one in Dublin. Rental growth was positive - albeit only marginally - at the all office level in Ireland in the first three quarters of 2005 and, at the sub-sector level, there has been the same pattern of resilience and resurgence through the downturn and upturn.

During the downturn (the period from June 2002 to December 2004 when all office rental value growth was negative), rents in Dublin 1, 2 and 4 fell by -0.8 per cent, -2.9 per cent and -6.2 per cent respectively. During the subsequent upturn over the first nine months of 2005, Dublin 1 has seen a 1.3 per cent rise in rental values, double the 0.6 per cent increase seen in Dublin 2. Dublin 4 rental values have continued to inch downwards, declining by -0.3 per cent.

A similar situation has occurred in the UK; both City and West End rents began their decline towards the end of 2001. Having fallen by 19.2 per cent, West End rents bottomed out in March 2004, since when they have risen by 4.4 per cent. In the City, the 18 per cent fall in rents ended in November 2004, since when rents have rebounded by only 0.6 per cent.

Over the first nine months of 2005, Irish property returns, at 14.6 per cent, have comfortably exceeded returns on equities and bonds - at 12.5 per cent and 8 per cent respectively - and have already beaten the 11.5 per cent achieved by property in 2004. If the rate of return seen over the first nine months of the year continues into the final quarter, Irish property will deliver returns of around 20 per cent in 2005. However, historically, around 40 per cent of performance has come through in the final quarter of the year; if this trend were maintained in 2005, Irish commercial property returns would be nearer 25 per cent. Both these estimates comfortably exceed expectations for the UK market. In the UK, total returns of 12 per cent for the first nine months of the year would equate to an annual performance of 16.4 per cent.

Dominic Smith is research manager at IPD. IPD 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