Despite dramatic falls in capital values and deteriorating economic conditions, rents did not suffer in 2008, writes ANGELA SHEAHAN.
THE EMPHATIC headlines cataloguing the sharp reversal in fortunes for Irish commercial property investors came thick and fast last year, as capital values tumbled by -37.2 per cent in 12 months. Return on investment, including a minor uplift from income returns, was -34.2 per cent for the year.
The severe decline in capital values can be accounted for by the huge increase in yields, which caused a dramatic re-pricing of cashflows. The performance of retail and shopping centre sectors make for interesting comparisons. Over 2008, the prime retail locations – such as Grafton Street and Henry and Mary Street – were hit the worst. Capital values almost halved in both central locations, falling -49.8 per cent and -49.3 per cent, respectively.
Elsewhere in the retail sector, shop units in the rest of Dublin saw values fall by -43.6 per cent while standard retail in the rest of the country also suffered, with values in Cork down by -43.4 per cent and in Limerick by -47.7 per cent.
It was a case of the fastest risers in the property boom being the sharpest fallers in the bust. Between 2003 and 2007, Grafton Street and Henry and Mary Street saw annual capital growth of 22 per cent and 20 per cent respectively, compared with 18 per cent in the rest of Dublin and 14 per cent in the rest of Ireland.
Shopping centres have held up better since the downturn with values down by -39.4 per cent in Dublin and -32.8 per cent in the rest of Ireland. One of the features of this property recession is that despite the dramatic falls in capital values and deteriorating economic conditions, rental values did not suffer in 2008. At the all property level, rents grew by 2 per cent in 2008. In standard shops Grafton Street saw the poorest rental growth of 0.9 per cent for the year compared to 4.6 per cent in Henry and Mary Street and 4.9 per cent in the rest of Dublin.
Grafton Street has seen the strongest growth over the boom period at 13 per cent between 2003 and 2007, compared to 10 per cent in Henry and Mary Street and 8.1 per cent in the rest of Dublin. Elsewhere, rental values on shop units saw strong growth in Cork at 7 per cent in 2008 but less so in Limerick, at just 0.3 per cent.
Shopping centres saw rental growth of 4 per cent with Dublin centres seeing moderate growth at 3 per cent and centres in the rest of Ireland seeing 6 per cent growth in 2008. In 2007 rental growth had been significantly stronger in Dublin shopping centres, at 4 per cent, compared to 0.4 per cent in the rest of Ireland.
Broader market conditions last year forced a significant rise in property yields; by 65 per cent in shopping centres with an average equivalent yield of 6.7 per cent at the end of 2008.
The rise in standard shop unit yields has been even more dramatic, with a rise of more than 100 per cent in Grafton Street and Henry and Mary Street.
In Grafton Street, yields increased from 2.7 per cent at the start of the year to 5.4 per cent at the end of 2008. In Henry and Mary Street the increase was from 2.6 to 5.5 per cent. The rise in vacancy rates is another key market indicator; with the proportion of vacant space in the retail sector rising by circa 20 per cent between the start and end of 2008.
* Angela Sheahan is head of indices at the London-based Investment Property Databank (IPD) which is a global provider of performance measurement for the property industry
