Quarterly returns from Irish commercial real estate rose to 7.2 per cent in the first quarter of 2014, the highest level since Q2 2006, according to the IPD/SCSI Ireland Quarterly Property Index.
The strong returns achieved in Q1 2014 further confirm the market recovery which first started to emerge in the middle of last year, when the decline in values that had started in late 2007 finally turned around.
Capital values grew by 5.0 per cent during Q1, again the highest since 2006.
The recovery has been very much spearheaded by the office sector, which returned 8.4 per cent in Q1 2014 alone, following on from six previous quarters when it also led the market. Office values, nationally, have now risen by nearly 12 per cent in the past six months, with central Dublin leading the way. However, recovery has now also spread to other parts of the Irish market, with the retail sector returning to growth after six years of decline.
Total returns for the Irish market over the last 12-months now stand at 19.4 per cent, with nearly half this made up by an income return of 9.0 per cent - the highest for any market measured by IPD globally. With Ireland’s economic fundamentals now solidifying, this high level of income has continued to prove attractive to both domestic and foreign investors. For offices in particular, the strong income position is being bolstered by an improving occupier market, reflected by the significant rental value growth of the last six months.
The growth in retail values, 3.9 per cent over the last quarter, has thus far been based on strengthening investor demand. Constrained consumption continues to pull down rents, but the reduction over the most recent quarter was marginal at -0.7 per cent. However, with the continuation of government reforms, employment levels are now showing significant improvements, which appear to be reflected in a positive re-assessment of risk among retail investors. Recent surveys of consumer spending and sentiment have re-inforced this re-appraisal.
Industrials have proved the weakest of the three main sectors over the last half-year, but there are encouraging signs that the long downturn may be easing here too. Capital values were stable in Q1 2014, following a small rise at the end of last year, while rental values, though falling slightly in the last quarter, have been improving over the last 12 months overall.
The 12-month return to the end of March 2014 at 19.4 per cent was higher than that for the UK over the same period (14.0 per cent according to the IPD UK Monthly Property Index). Irish real estate also outperformed Irish bonds, which returned 13.8 per cent over the last 12 months (JP-Morgan 7-10 yr) but underperformed equities, which returned 33.6 per cent (MSCI Ireland).
Ray Hanley, chairman of the Valuation Professional Group of the Society of Chartered Surveyors Ireland (SCSI), says: “The positive returns in the first quarter of the year follow on from improved investor sentiment and transaction levels towards the end of 2013, particularly in the office sector. This has been driven by several factors including increased stability in the Irish economy, considerable demand from both domestic and international investors, the extension of the capital gains tax relief in 2014 and continued interest from multinationals and technology firms in particular, in establishing or extending their European bases in Ireland.”
Phil Tily, executive director & head of UK and Ireland, IPD, says: “Growth now looks to be well established in the Irish commercial property market, reaping rewards for the efforts made by the government and the property industry to rebuild confidence for the long-term. This is mainly being borne out by improving investor sentiment on the back of an overall re-assessment of prospects for the economy, but also now the re-emergence of capital growth for retails is evidence of the growing confidence amongst investors in Irish consumers.”