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Irish real estate returns reach seven year high in 2013

Irish commercial property returns rose to 12.7 per cent in 2013 as the Irish property downturn reached its nadir and property values increased amid improving economic sentiment.

According to the IPD/SCSI Ireland Quarterly Property Index, property values rose by 3.2 per cent for the year – the first annual capital growth since 2007 – while income returns averaged 9.2 per cent.
 
Real estate values began to grow in selected prime office markets at the start of 2013, but headline level capital growth did not emerge until Q3, halting the 23-quarter decline that has seen values fall by over 65 per cent.
 
While the turnaround was mainly driven by Dublin’s office markets, improvements in the Irish economy in the second half of 2013 led to this growth spreading to both the retail and industrial sectors by the fourth quarter - for the first time since the onset of the downturn.
 
Capital values for retail assets rose by 2.1 per cent in Q4, leading to a total return of 3.8 per cent; while for industrial units they grew by 0.6 per cent, leading to a total return of 3.5 per cent. Offices continued to deliver the strongest returns, of 7.2 per cent, as values increased by 5.0 per cent.
 
Overall, quarterly commercial property returns reached 5.7 per cent, off the back of capital growth of 3.6 per cent. Comparatively, bonds and equities delivered 3.9 per cent and 9.4 per cent in Q4, and 13.1 per cent and 35.6 per cent for the year (JP-Morgan 7-10 yr/MSCI Ireland).
 
The heavy discounting of Irish real estate has pushed annual income returns to over 9.0 per cent, which has attracted a host of investors from home and abroad, and led to the successful launch of Ireland’s first two REITs, all keen to take advantage of pricing in the market.
 
However, it is has been the economic and austerity-led improvements that have finally increased investor confidence, with property growth being backed up by a host of positive economic indicators. The second half of 2013 saw Ireland exit its EU/IMF EUR85bn Euro bailout – the first European country to do so – GDP growth of 1.5 per cent in Q3, and unemployment fall to 12.5 per cent (Central Statistics Office).
 
Rental values, a measure of tenant demand, finally increased at the headline level in the fourth quarter of 2013 as a result of these economic improvements, by 3.7 per cent, which has increased the confidence of investors in their ability to let assets.
 
Backing up the positive pricing sentiment, the fourth quarter of 2013 saw a flurry of net investment into the Irish market – with levels of net investment reaching EUR243m, their highest since 2006, and the third highest year of net investment in the 30 year history of the index.
 
Ray Hanley, chairman of the valuation professional group of the Society of Chartered Surveyors Ireland (SCSI), says: “The recent announcement from Moody’s – that Ireland’s debt status has been upgraded back up to investment grade - is a positive indicator of the improving outlook of the Irish economy. This should have a positive impact on the investment market during 2014."
 
Phil Tily, executive director & head of UK and Ireland, IPD, says: “2013 has been a year of transformation for Irish real estate, with returns rising from 1.3 per cent in Q1 to 5.7 per cent in the fourth quarter, and it is encouraging to see capital growth already spreading out of the Central Dublin office markets.
 
“While the recovery remains in its infancy, the reforms made by the government in 2012 regarding the property sector have done much to restore confidence and stability for investors, and hopefully 2013 will be remembered as the year that Irish property market finally shook off the dark days of the downturn."

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