Two surveys published today confirm the commercial property market had its best year in 1998, showing overall returns of 38 per cent and 39.2 per cent. The previous highest return of 37 per cent was recorded in 1978.
The strong performance was always on the cards in a year of continuing economic boom, falling interest rates and a shortage of prime properties.
The London-based Investment Property Databank (IPD) reports that overall returns for the year to the end of December were 38 per cent, while Jones Lang Wootton's (JLW) index puts the increase even higher at 39.2 per cent.
The record returns come in the same week IPD reported UK commercial property turned in a significantly worse performance in 1998 than in the year before, offering total returns down from 15.5 to 12.2 per cent.
In Ireland, IPD calculated capital values rose by 29.8 per cent throughout the year, almost double the rise in 1997. This growth was built on a 15.3 per cent improvement in rental values combined with further downward pressure on yields.
JLW, on the other hand, estimated that capital values increased by 32.1 per cent in 1998. The market ended the year strongly, according to IPD, with the fourth quarter seeing a return of 10.5 per cent. During these three months, yields fell by over a quarter of a point, while rental values rose by 5 per cent. JLW puts the overall returns in the last quarter at 7.7 per cent, with capital values up 6.5 per cent.
IPD says the strong performance in 1998 was mirrored in all three sectors of the market. Retails recorded a return of 34 per cent, up 10.7 points on 1997. Underlining this steady performance, rental values rose by 12.1 per cent, accompanying further reductions in yields. Retail yields, which fell in all four quarters, dropped by 0.29 of a percentage point in the last three months, finishing at an all-time low of 5.85 per cent.
With a return of 42.4 per cent, offices were by far the best performing sector of the market in 1998, doing better than retails, their closest rival, by 8.4 percentage points. Capital values in this sector rose by 34.2 per cent over the year, mostly due to a 18.3 per cent uplift in rental values. Office rental value growth continued to accelerate through the year. A gain of 6.3 per cent in the final quarter alone helped capital values rise by 10.2 per cent.
IPD's index put industrial returns at 28.9 per cent. This figure suggests that industrials ran a little behind the other two sectors, with capital values up by 19.7 per cent and an income return of 9.3 per cent. In line with the other two sectors, the industrial market strengthened in the final quarter of the year, with a return of 9.1 per cent. Rental value growth of 4.1 per cent combined with a 0.28 of a percentage point reduction in yields to produce capital growth of 7.2 per cent in the last quarter.
Margaret Fleming of JLW says the continued favourable environment of falling interest rates, generally low supply and strong demand resulted in four strong quarters in 1998. According to JLW, the strongest capital increase for the year and the fourth quarter was in the office sector, where values rose by 35.2 and 6.9 per cent respectively. Office rental growth for the year was recorded at 17.2 per cent and 4.6 per cent for the fourth quarter.
JLW's figure for the retail sector are slightly ahead of IPD, showing a capital growth of 31.9 per cent, mainly because the portfolio is strongly weighted in prime high street properties. The industrial sector saw modest capital growth of 15.9 for the year and 5.5 for the quarter.
