MarketReport:Commercial rents have done well over the past 18 months but are showing signs of slowing and, while the economic outlook is healthy, there is some cause for concern, according to an assessment of commercial property rent performance.
The Rental Indices report published by Lisney Research notes the strong performance of the global, European and Irish economies during 2006. Our economy continues to "outperform" relative to European and historical norms, with strong personal consumption and strong retail sales.
But there are clouds on the horizon. While SSIA money over the coming months will deliver "continued buoyancy", inflation, which last week fell to 4.8 per cent, is a concern, the report notes. Lisney also suggests "any further strengthening of the euro against the dollar could undermine competitiveness. In addition, any further increases in interest rates could dampen sentiment".
The indices track commercial property rents at three levels: one overall, combining all three sectors; one at sectoral level (retail, office and industrial); and a sub-sectoral level within the three main sectors of retail, office and industrial. Its overall market view indicates commercial property rents have achieved strong growth, with rents showing a 21 per cent improvement between June 2005 and December 2006.
"Rental growth has been strongest in the retail sector, rising by over 27 per cent in that period. Rents jumped by more than 10 per cent in the last quarter of 2005 and again by 8.5 per cent in the third quarter of 2006," the review indicates.
Performance slowed considerably in the final quarter of 2006, however, with growth of just 1 per cent. Average office rents also rose strongly by almost 18 per cent over the reference period. Industrial rents were sluggish, increasing by less than 3 per cent. They have remained static for the past nine months, the report states.
The star performer within retail was Grafton Street, with Zone A rents reaching €9,500 per sq m (€882.5 per sq ft), about 50 per cent more expensive than nearest rival, Henry Street, the report states. "While demand remains strong, proposed planning restrictions on retail uses could affect rental conditions on the street in the future," the report says.
Dublin shopping centres have done well, racking up rent increases of almost 24 per cent over the reference period. Dundrum has overtaken Blanchardstown in rental value per square metre, but remains below Liffey Valley. Rents for retail warehousing have remained static, indicating a possible oversupply of space in this sector.
Solid growth has also been recorded by the office sector. Headline rents for Dublin city centre offices reached almost €650 per sq m (€60.4 per sq ft) at the end of 2006, with low vacancy levels and take-up "hitting new record highs across the market". This sector did see a slowdown towards the end of 2006, with rental growth easing back to 12.8 per cent. The report predicts strong growth in the coming months, particularly in city centre Dublin where space is at a premium. Lisney forecasts rents of €754 per sq m (€70 per sq ft) by the end of this year.
The industrial sector remained disappointing. There were signs of an uplift early in 2006 with rental growth of around 2.5 per cent but this was not sustained. This is an advantage for the tenant, however, with agreements "still being sweetened by inducements such as rent-free periods and flexible terms", the report states. "The opening of the Dublin Port Tunnel is expected to stimulate increased industrial demand, particularly in the Fingal and east Meath areas," it adds.
This is a new series of quarterly rental indices that replaces the previous semi-annual indices from Lisney. "The new indices have been reweighted to reflect market changes and they incorporate rental data from an updated basket of property types and locations," according to Lisney.
