Two new reports suggest that the buoyant property market is now largely being driven by a resurgence in the office sector, writes Jack Fagan

The Dublin office market is well on the road to recovery with rents showing their first substantial rise in five years during the first three months of the year. The buoyancy in the office sector is highlighted in two studies published today, the SCS/IPD Index and the Jones Lang LaSalle Irish Property Index.

The JLL report estimates that office rents grew by 1.5 per cent during the quarter, the highest three-month rental rise seen in the sector since 2001. In addition, growth in the capital value of offices marginally exceeded that of the retail sector (6 per cent versus 5.9 per cent) for the first time in a year.

IPD went even further, pointing out that the buoyant conditions within the property market during the first quarter of the year can, in large part, be traced to the ongoing resurgence among offices, which it says emerged as the best performing sector with a 6.4 per cent return. Rental values in this sector maintained their upwards momentum, rising by 0.7 per cent. That said, the study showed that most of the gain on office returns was still yield-driven with the average office equivalent yields hitting 5 per cent.

IPD calculated that the total return for commercial property in the first three months of 2006 was 5.4 per cent compared with 4.5 per cent in the same period of 2005. The JLL index put the returns for the quarter higher at 6.8 per cent to bring the 12 monthly returns up to 27.6 per cent.

JLL also reported that overall capital values rose by 5.6 per cent during the quarter and by 21.9 per cent over the 12 months. Rental values grew by 1.4 per cent during the quarter and 3.6 per cent during the year ended March.

Measured annually, IPD found that property returns climbed to 25.5 per cent, their highest point for five years, which is the net product of a 5.1 per cent income return and 19.4 per cent capital growth. The 5.4 per cent quarter return for property compares favourably with that of bonds where returns were cut back to -3.3 per cent. The equity market, by comparison, continued to strengthen, delivering a 10.2 per cent return for the quarter.

IPD reports that capital values continued where they left off last year, rising by a further 4.2 per cent in the first three months of 2006. Rental values gained further ground but their level of improvement slowed to 0.8 per cent. Meanwhile, yields moved further into unchartered territory, dropping to a record low of 4.7 per cent, implying that "there is simply no let up in the confidence for growth within the market".

Dr Claire Eriksson of JLL says that one of the most notable factors has been the first substantial rise in office rents since 2001, although the overall growth in capital values has dominated the market. JLL said that, although capital growth in offices slightly exceeded that of the retail sector during the quarter, the capital growth in the retail area was higher over the 12 months, rising by 25.4 per cent compared to offices' 21 per cent. Conversely, retail showed the strongest rental performance, with a marginal growth of 1.7 per cent during the quarter and 8.1 per cent during the year to the end of March.

IPD figures showed that retail fell further behind the offices with a 4.5 per cent return but continued to lead the field in terms of rental value growth. Retail rental values were up 1.3 per cent but more significant was the fact that yields dropped below the 4 per cent threshold, closing the quarter at 3.8 per cent.

The IPD quarterly review shows how, within the retail market, Grafton Street made a relatively quiet start to the year; the lead being taken up by other city centre markets (districts 1 and 2, excluding Henry, Mary and Grafton Street) and unit shops outside Dublin. Retail warehouses also made good progress this quarter with a return of 6.6 per cent.