Irish commercial property returns resumed their upward trend in the second quarter of the year, largely because of higher rents.
The London-based Irish Property Databank (IPD) registered an all-property return of 6.8 per cent, just ahead of the 6.4 per cent recorded in a separate index by Jones Lang LaSalle. The new findings contributed to an extremely healthy 28.7 per cent return over the last 12 months in the IPD survey and 27.3 per cent in the Jones Lang report. The 6.8 per cent recorded by IPD in the three months up to June compared with 5.1 per cent in the first quarter. Capital values in the second quarter were up 5.6 per cent and by 22.5 per cent for the year. IPD calculated that yields fell a further 6 basic points and rental value growth increased by 4.9 per cent over the period. Rental values have now risen by 8.1 per cent in the first half of the year compared to 6.2 per cent in the corresponding period of 1999. Yields, although still falling, are coming down at a much slower rate than they were last year.
The IPD index shows that Irish property continues to overshadow other asset classes. Equity returns came down quite heavily during the quarter, standing at minus 12.7 per cent. Gilt returns were also relatively low, but remained positive at 0.8 per cent.
Property returns improved in all three sectors of the market over the last quarter, ranging from 5.3 per cent for retails to 7.6 per cent for offices. There was little to choose in terms of the yield movement between the three sectors: office and industrial yields fell by 6 points while there was a 5 per cent reduction in retails. Rental value growth was the key differential between the three sectors. The superior performance of the office sector was maintained by a 5.8 per cent increase in rental values over the last quarter, which in turn contributed to an impressive 6.4 per cent capital growth.
In contrast to the annual picture, returns in the central Dublin office market over the last three months were fractionally lower than in the rest of the country. Industrials, with a return of 6.3 per cent, made particularly strong progress in the second quarter. Capital growth of 4.6 per cent was more than double the rate of increase recorded in the first three months of the year. This can primarily be attributed to a 4.1 per cent increase in rental values over the period.
With a return of 5.3 per cent, retails also improved on their position at the end of the first quarter. Capital values climbed by 4.1 per cent over the three months to June, supported by a 3.1 per cent increase in rental values. An analysis of unit shops shows that returns as high as 10.3 per cent were achieved in the Henry Street/Mary Street area. Shopping centres, by comparison, delivered a modest 3.5 per cent return. The Jones Lang LaSalle index gives a return of 12.1 per cent in the year to date compared to 13.9 per cent in the same period last year. Capital values across the portfolio rose by 5.3 per cent in the second quarter of 2000, which is a faster rate of growth than in the previous two quarters. Capital growth for the year to date is 9.8 per cent and 22 per cent in the 12 months to the end of June. Jones Lang says that although property performance remains strong in absolute terms, there is a trend towards a slower pace of growth. The returns in the last quarter were the lowest since 1997.
Overall returns for the entire portfolio in the year to March last were 27.6 per cent. There was a very even performance across all the sectors this quarter. Retail capital growth at 5.1 per cent was underpinned by rising rental values, especially in locations such as Patrick Street in Cork and Henry Street in Dublin.
Office capital values continued to rise steadily, up 5.1 per cent in the second quarter. There are still some minor yield adjustments in the portfolio, but most of the growth is based on rising rental values. Industrial capital values are up by 4.8 per cent, with prime yields below 7 per cent now becoming more established in this sector.
Rental values rose by 5.2 per cent in the quarter up to the end of June. Again, this was quite evenly spread between the sectors, with offices rising 5.3 per cent, retail up 5.5 per cent and industrial rental values increasing by 4.4 per cent. Offices are still well ahead on a year-on-year basis, with 20.8 per cent growth in the year to June compared to 12.4 per cent in retail and 8 per cent in industrial. The low vacancy rate in offices is fuelling this growth.
