Results for Irish property should be healthier than in December 2002. An annual return in excess of 10 per cent may be achieved and this could exceed the UK, where the latest IPD Monthly Index has estimated a return of 9 per cent, writes Cameron McVean.
This year has seen a sustained recovery in the performance of the Irish property market. Total returns on the SCS/IPD Irish commercial property index rose to 8.8 per cent in the 12 months to September, a much healthier position than that of a year ago when the corresponding figure was just 2.2 per cent.
The recovery began back in December 2002 when equivalent yields edged down after a year of increases. This downward shift of the yield mitigated the 3 per cent hike in stamp duty and, although values were reduced, these were not by the margins expected. For the first three quarters of 2003 equivalent yields have continued to fall and now rest at 5.9 per cent. This sustained reduction in yields indicates continuing investor confidence in the market. Rental value growth in Ireland - although remaining low - has continued its upwards momentum through 2003, recording an annual growth of 2.1 per cent at September 2003. That said, rental growth remains low compared with that of recent trends, reflecting the weakened economy and reduced tenant demand, particularly within the office market.
Economic forces have had a more damaging impact on UK rental values, which have fallen by 1.6 per cent over the past year. UK investors have, however, been heartened by recent trends, with rents dropping by just 0.1 per cent in the last quarter. This in turn may have had a positive impact on yields, which closed in by four basis points over the same period.
These improvements in the basic fundamentals - rents and yields - coupled with a decision by the UK's Chancellor of the Exchequer, Gordon Brown, to make buildings in deprived areas stamp duty exempt, has pushed up market values for the year, contributing to an annual return of 10.3 per cent by end September. Within both countries retails remain the most successful of the sectors. This year has seen UK retails prove their worth as a solid "defensive play". Returns have remained strong throughout 2003 as robust consumer confidence and demand for space has driven rents up and yields down.
By the end of the third quarter of 2003 UK annual retail returns had reached 15.2 per cent. The strength of the Irish market is even more dependent on the retail sector, where returns have risen to 22.1 per cent over the same time period. This success is built on the same fundamentals as in the UK - a demand for space and a lack of supply - which has driven rental values to record highs, particularly in city centre locations. Interestingly, however, economic reviews for this year indicate a gradual slowdown in consumer spending in Ireland.
Although still very much in the doldrums, the fortunes of the UK and Irish office markets have picked up during the course of 2003. To a certain extent both markets have demonstrated similar themes; a continued - albeit slowing - drop in rental values, coupled with modest reductions in yields. Both these markets may in turn be responding to forecasts of an improved global economic outlook. In the UK, in keeping with the position a year ago and despite the continued support by foreign investors, central London offices, with a return of 2.5 per cent, continue to trail the major regional markets. The Irish office market, which is far more localised, has achieved its highest return for the year, of 4.9 per cent, in central Dublin 2.
Looking forward, year-end results for Irish property should be healthier than they were in December 2002. Annual returns reported to date are still affected by the increase in stamp duty. With this feature removed an annual total return in excess of 10 per cent might be achievable in December. This might keep pace with the UK, where the latest re-weighting of the IPD Monthly Index has estimated a return of 9 per cent.
Cameron McVean is an analyst at Investment Property Databank
