Quarterly returns from Irish commercial real estate accelerated to 8.5% in the second quarter of 2014, their highest level since Q2 2006, according to the IPD/SCSI Ireland Quarterly Property Index.
These strong returns confirm that the Irish market recovery is now firmly established, with property values rising throughout the last 12 months. Capital growth of 6.5% for Q2 2014 was also the highest since 2006, and has been accelerating over each of the last four quarters.
The office sector continued to lead the market in Q2 2014, returning 10.1% in the last quarter alone, which implies eight consecutive quarters of market outperformance for the sector. Office values, nationally, have now risen by 22.7% over the last year, with values right across the Dublin office markets rising by more than a quarter in the same period. However, other parts of the Irish market are also now very much in recovery mode. Retail property values have grown by more than 10% over the last three quarters, after six years of decline, while industrial values are up 2.2% since Q3 2013.
Income return at 8.6% for the Irish market over the last year now constitutes a less significant component of the overall total return of 26.6% than it had done in previous quarters. However, the income return for Irish property is still the highest for any market measured by IPD globally. This high level of income is continuing to prove attractive to both domestic and foreign investors as general Irish economic conditions maintain their improving trend.
Unlike in previous quarters, the high returns for Irish offices over the last quarter have stemmed overwhelmingly from a strengthening occupier market, with rental value growth reaching 11.0% in Q2 2014, a quarterly level that has not been matched this millennium. Reductions in yields, reflecting increasing investor demand, meanwhile added less than 2% to office capital values.
In contrast, the growth in retail values, which accelerated to 4.2% over the last quarter, was entirely dependent on strengthening investor demand. Improving prospects for retail consumption and the health of occupier markets lay behind this, reinforced by the fact that the run of 21 consecutive quarters of falling retail rental values finally ended in Q2 2014; rental values were stable over the quarter. This reflected the view that despite many indicators on the Irish economy looking increasingly positive, personal consumption has thus far proved sluggish; however retail investors look to be expecting an improvement.
Industrials have proved the weakest of the three main sectors in each of the last three quarters, but here too capital growth took hold in Q2 2014, at 1.7% for the quarter, the strongest quarterly growth since June 2007. As in the retail sector, industrial rental values were however static on balance in the first half of 2014, with positive economic indicators slow to percolate through into occupational demand.
The 12-month return for Irish commercial property of 26.6% to the end of June 2014 was higher than that for the UK over the same period (17.6% according to the IPD UK Monthly Property Index). Irish real estate also outperformed Irish bonds, which returned 19.6% over the last 12 months (JP-Morgan 7-10 yr) but underperformed equities, which returned 28.6% (MSCI Ireland).
Colm Lauder, Senior Associate, IPD, says: “Growth in the Irish commercial property market is now looking impressive, with the levels of return starting to rival those last seen in 2006. However, it should be stressed that today capital values are rising from a much lower base, with equivalent yields averaging 7.3% at the end of June 2014 compared to 4.0% at the height of the last boom. At the same time market rents are now moving ahead after a long period of economic stagnation as hard-earned fiscal reforms inject confidence in the Irish economy.”
Ray Hanley, Chairman of the Valuation Professional Group of the Society of Chartered Surveyors Ireland (SCSI), says: “The Dublin market is continuing to strengthen and investment volumes have continued to increase due to strong demand from both domestic and overseas investors, particularly for modern office space. Given the level of competition in Dublin and in other major cities, we are now starting to see more investors move up the risk curve and seek opportunities such as in the retail sector, with considerable interest being generated in a number of regional shopping centres which are currently on the market, which should assist in the recovery in areas outside of the main cities.”