Capital growth in the retail sector is behind strong growth in the market. Jack Fagan reports

The continuing rise in the value of retail properties has again helped the improving fortunes of the commercial property market, according to the latest Irish Property Index published by Jones Lang La Salle.

Overall returns in the three months up to the end of June reached 6.4 per while the year-on-year growth was 18.8 per cent.

The exceptionally strong capital growth in the retail sector, even though rent increases have tapered off, has been driven primarily by investor demand.

That demand is not being met because of the reluctance of institutions and private investors to offload retail properties at a time when capital values are growing rapidly and there are few investment alternatives.

The uncertainties of the stock market in recent years have brought considerably more funds into property but most of it is being spent abroad because of the scarcity of stock here.

Overall capital values rose by 13.2 per cent in the year to June, with the quarter showing a rise of 5.2 per cent, according to the index.

Of the three commercial property sectors, retail did best, rising by 6 per cent in the second quarter and by 20.2 per cent in the year to date.

Capital values in the office sector continued a positive upturn with a quarterly increase of 4.8 per cent and a year-on-year growth of 9.5 per cent.

The industrial sector had the lowest capital growth with a rise of 3.2 per cent in the quarter and an annual growth of 9.4 per cent.

Rental values across the portfolio grew marginally in the second quarter with a rise of 0.8 per cent, although overall rental values had a stronger annual performance with a 3.2 per cent increase in the year to June.

In the three months up to the end of June, industrial rental values (2.6 per cent) surprisingly exceeded the 1.7 per cent rise in retail rents.

"Retail rents have had a protracted phase of rapid growth which appears to have reached a plateau this quarter," explained the Jones Lang researcher.

"This is the first time since the second quarter of 2003 that the retail sector has not had the highest rental value performance and is the main change in the index trend line.

"However the capital performance of retail property suggests that there is still very strong investor confidence in the retail sector."

Annual rental value increases for the retail sector of 10.2 per cent still outperform industrial which had a year-on-year change of 3.4 per cent.

Office rental values had a slight increase of 0.1 per cent in the second quarter and rose by 0.2 per cent in the year to June.

The overall income levels of the Jones Lang portfolio dropped marginally in the second quarter by minus 0.7 per cent.

This drop is not representative of the market generally and arose because one particular building in the portfolio became vacant.