Dublin offices lead recovery

When the UK property market rebounded in late 2009, the ailing recovery was neither national nor regional but almost purely driven by central London, in particular, central London retail, with offices following later. Shops in London are now worth almost 10 per cent more than they were when the market last peaked at the end of 2007. A new bubble could be forming, but early signs point in a different direction, as value growth has been mostly driven by an uplift in rents, not the well-publicised charge of foreign investors clamouring for assets. The burgeoning Irish recovery is following a similar path, although here, it is Dublin offices leading the charge, with regional properties struggling to regain their feet.

Trend
The Dublin versus the rest of the country recovery is very much a reality in commercial and residential property, as it is for job growth and broader economic performance. If Ireland follows the same mode as the UK, it may take several years for recovery to trickle down to the regions from the capital.

Only now, at the end of the third quarter of 2013, are UK regions starting to see a consistent pick-up in rents and values, almost four years after London property started to recover. Already the Irish office market is following this trend, with central Dublin office values increasing by 2.3 per cent in the first half of 2013, while office values outside the capital fell by a further 2.6 per cent.

While there have been clear signs of improvement in the Dublin office sector, retails are still struggling nationwide. Even prime retail spot, Grafton Street, saw values contracting by a further 4.3 per cent during the six months to the end of June; provincial retails found the going even tougher with a fall of 9.5 per cent. Cork city outperformed other provincial locations, with shops on St Patrick's Street in particular, falling 3.5 per cent in the first half of 2013. With this and an annual income return of almost 10 per cent, once values level out, Cork may provide significant returns for investors willing to move further up the risk curve.

Risks
Investors moving into the Irish market are well aware of the risks involved. However, many investors will consider themselves sufficiently rewarded with double-digit income returns and the prospect of fresh rental growth as supply is squeezed in key locations. Compared with other markets, Ireland offers heavily discounted assets, in a market where there is relative political, social, and economic stability. Other distressed markets simply cannot yet match this risk/return and value profile. At the end of 2012, values in Spain had only fallen 30 per cent so far since the peak, this compares with Ireland's 65 per cent discount.

The third and fourth quarter results for Irish property are expected by many to show continued improvement in Dublin and perhaps some levelling out of rents and capital values for key provincial cities. The high- income returns are already a key attraction so any advance in capital or rental values could bolster investment returns into comfortable double digits for the year 2013.

The Q3 2013 Results for the IPD Ireland Property Index will be released next Wednesday and will be available on ipd.com.

Colm Lauder is a consultant for the UK and Ireland markets at IPD