Commercial property returns up 13.6% in 2016, says JLL

Overall returns from the Irish commercial property investment market grew by 13.6 per cent last year, according to the latest index from estate agent JLL. The comparable figure for 2015 was 25.5 per cent.

The latest findings are slightly ahead of those from international researcher MSCI, which reported that total returns to investors were 12.4 per cent in 2016. This is down from 24.9 per cent in 2015, given that the rate of capital growth, at 7.4 per cent, was less than half the 18.7 per cent achieved in 2015.

The JLL property portfolio recorded returns of 3.8 per cent in the last three months of 2016. Capital values in the same quarter increased by 2.4 per cent and by 7.8 per cent over the 12-month period. This was driven by growth across all three sectors, with industrial recording the best performance over the year of 17.9 per cent, followed by retail (7.2 per cent) and offices (6.5 per cent).

International funds still seeking out property investments with good potential will be well aware that capital values have increased by 78.3 per cent since the bottom of the market, but are still 41.4 per cent lower than the peak in the third quarter of 2007.

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JLL also reports that overall income increased by 1.5 per cent in the final three months of 2016, though in the year as a whole it fell marginally by 1.3 per cent. These mixed results stemmed from a 3.4 per cent slippage in the first quarter because of what JLL calls “some lease events and a vacancy in the portfolio”.

On a more positive note, rental values across the entire portfolio increased by 4.1 per cent in the final three quarters of 2016 and by 10.6 per cent in the year as a whole. The office sector fared best, rising by 14.1 per cent, followed by industrial (7.8 per cent) and retail (6.2 per cent).

Hannah Dwyer, head of research at JLL, said the overall returns were in line with the long-term annual projections for the JLL Index since 1972 of 13.2 per cent. Capital growth was the main driver, with an uplift of 7.8 per cent in the year, and a particularly strong growth in values for the industrial sector of 17.9 per cent.

Significantly for those who fear the emergence of a pricing bubble, the key driver of performance in the MSCI data was market rental value growth (average rents rose by 7.4 per cent), rather than yield compression, according to Colm Lauder, real estate analyst with Goodbody. He said yields had rebounded between 2013 and 2015, but this rally seemed to have found its level by the first quarter of 2016, as investor exuberance for the recovery in values shifted to prioritising income growth.