Returns higher in Ireland than in UK in 2012 but values still falling, says IPD
Though discounted by over 67 per cent, Irish property values fell a further 1.5 per cent in the last quarter of 2012, bringing total declines for the year to 6.4 per cent.
Despite this, Ireland's total return for 2012, 3.1 per cent, was 60 basis points higher than the UK's (as measured by the IPD UK Monthly Property Index), buoyed by a double digit income return of 10.1 per cent, one of the highest measured around the world by IPD.
2012 was the first year of positive returns for the Irish market since 2007, according to the SCSI/IPD Ireland Quarterly Property Index.
The raft of measures introduced by the Irish government last year to bring some relief to the struggling market did not have an immediate effect on Irish property performance. Eurozone contagion fears and slow economic growth, continued to negatively impact on investor sentiment and occupier demand, but they have gradually helped to restore confidence in some prime areas of the market.
Stamp duty reductions, a moratorium on capital gains tax and a final decision on retrospective rent reviews all brought much needed stability, and as a result capital declines, particularly in the office sector, slowed throughout 2012 - compared to an 11.4 per cent decline at the headline level in 2011.
A number of “big name” international tenants have moved to Ireland over the last two years, attracted by improved Irish competiveness, maintenance of low corporation tax, a well-educated young workforce and heavily discounted rents - 48 per cent below their 2008 peak.
Improving tenant demand has attracted the attention of investors interested in heavily discounted assets. 2012 saw some of the first big sales, in the office market, to international investors willing to move up the risk curve.
Phil Tily (pictured), IPD managing director for UK and Ireland, says: “Initial yields in Ireland are now in excess of 9.5 per cent, and as returns around Europe have slowed in a very difficult year, for those willing to consider counter cyclical investment plays, Ireland offers the opportunity to edge up the risk curve.
"Furthermore, GDP for the year is expected to be positive, and though under one per cent, it is nevertheless the second consecutive year of growth (after 1.4 per cent in 2011), and this may further boost the confidence of investors, valuers, and occupiers.
"While Ireland is certainly not yet out of the woods, for the first time in five years there have been some encouraging signs around the market."
Roland O'Connell, president, society of chartered surveyors Ireland, says: "We have seen in a marked increase in enquiries, and now sales, for good quality stock - prime assets - well located, well serviced, modern and with the ability to attract strong tenants. In this sense, any recovery in Ireland, as it was in the UK three years ago, will start in the prime, less risky areas.
“There is good value in the market at present which is attracting more interest from both domestic and international investors and hopefully more suitable stock will be released to the market soon."
Offices saw the strongest performance in 2012, delivering a total return of 4.9 per cent, and with values falling by 5.4 per cent.
Occupier demand has improved throughout 2012 for Irish offices. Rents fell in the first quarter by 0.8 per cent, but by Q4 this had eased to just -0.1 per cent, and in some prime sub sectors was positive.
Dublin's Docklands, mostly prime assets in Dublin's financial centre, recorded positive capital movements in the last quarter of 2012, and positive rental growth, of 0.2 and 0.8 per cent respectively – for the first time in five years. The Docklands area delivered a robust return of 8.4 per cent in 2012, comfortably ahead of the City of London office market, which returned 6.6 per cent.
The retail sector, in comparison, has continued to suffer at the hands of weak consumer spending, leading to poor occupier demand. Total return was just 0.5 per cent for 2012, as values slumped by a further 7.6 per cent.
Retail rental values, a measure of occupier demand, fell by 5.0 per cent across the year.
However, rental value falls varied nationally, with Grafton Street bearing the brunt of the decline, while Henry & Mary St was more resilient, seeing rental falls of just 1.3 per cent. Regionally, Cork City centre rents continued to fall with a decline 4.9 per cent and Limerick City by 4.5 per cent.
Tily says: "Whether the slight recovery seen in Dublin's Dockland's is a sign of the market beginning to turn is very much up to the wider economic situation in 2013 - whether more economic shocks curtail growth, whether government policy's continue to support the property market, and whether international investors tolerance to risk continues to soften.
"It has been a very difficult five years for the Irish sector, and it would be a relief to report some good news in 2013."