THE COMMERCIAL property market has now delivered four consecutive quarters of positive returns, amounting to 4.8 per cent over the past 12 months, despite underlying property values continuing to decline.

Leading researcher IPD has calculated total returns in Q3 at 0.7 per cent, a small increase on Q2, and still higher than the 0.6 per cent delivered by UK commercial property. To the surprise of many, Ireland has over the past 12 months outperformed the UK, which has only returned 3.5 per cent.

Despite this, Irish values fell by a further 1.7 per cent for the quarter, meaning losses now amount to a cumulative -66.6 per cent since the peak of the market. Income return, of 2.4 per cent, drove the overall performance into positive territory for the quarter.

Hovering around 9.7 per cent annually, income yields continue to make the Irish market competitive and attract the attention of the international investors looking for discounted assets with high income yields.

Nevertheless, IPD says that investors remain reticent as potential buyers have to be very careful in their asset management to maintain cash flows. Reversionary yields are only 6.7 per cent, as a considerable number of leases were signed at the top of the market. When these expire, income on a number of properties will fall considerably, back to the market level, and this will impact on future returns.

The SCS/IPD Ireland Quarterly Property Index also reports that rental values fell by a further 0.8 per cent for the quarter but this masks the considerable disparity emerging between the office and retail sectors.

Offices returned 1.3 per cent in Q3 and were the strongest performing sector in Ireland. The sector is seeing a marked improvement in tenant and investor demand, particularly for constricted supplies of prime stock, to the extent that rental values only declined by -0.2 per cent for the quarter – their lowest since December, 2008 – a firm indication of the improving conditions in the sector.

Conversely, Irish retail continues to struggle and was the only sector to record a negative return, at -0.1 per cent. Shaky demand from tenants, a result of low consumer spending, meant investors remained cautious around the sector. Rental values fell by a further 1.5 per cent for the quarter.

Phil Tily, IPD’s UK and Ireland managing director, said that for the first time since 2007 Irish commercial property has delivered a positive annual return, which was great news for the beleaguered market. “There remains some distance to go before the market can be said to be recovering, but key areas – such as the Dublin docklands office market – are benefiting from Ireland’s strong export services market and positive GDP growth. The improving economic fundamentals and keen demand from international tenants looking for cheap space are further signs that the market is starting to improve, albeit slowly.”

Tily said that much like the UK, there was going to be considerable disparity emerging between the different sectors but even in the struggling retail market there had been an easing of rental and capital value declines – no small achievement considering the wider economic uncertainty across the rest of Europe.

Colm Lauder, researcher at IPD, said the Irish recovery was likely to follow the same pattern as was seen in the UK, with investors targeting heavily discounted prime assets that could secure strong, long leased tenants, preferably from large multinational companies. “Dublin docklands will tick all of these boxes for investors. For the year to date, docklands had already returned 6.5 per cent, higher than the City of London’s 5.4 per cent. Prime areas of the Irish market are starting to reap the rewards of their heavily discounted values and high income yields, which, as other countries slow down, are hopefully going to stir up a bit of interest in the market.”

Roland O’Connell, president of the Society of Chartered Surveyors Ireland, said 2012 was the first year in over 50 that no new office building had been finished in the city and the lack of new construction in the pipeline had already steadied prime rents with upward movement expected.