Outlook for 2011 may be brighter

Returns fell 2.4 per cent last year, a much smaller decline than 2009’s 23.3 per cent drop

THE IRISH commercial property market may have brighter prospects in the year ahead, according to the latest findings of international researcher IPD. Overall returns for 2010 recorded a fall of 2.4 per cent – a vast improvement on the 23.3 per cent drop in 2009.

The shallow annual returns mask a double digit capital depreciation of -10.7 per cent which was driven by a second consecutive year of steep falls in rental values, down 19.3 per cent. This was only a slight improvement on 2009’s decline of 22.4 per cent. Since the start of 2009, rents have now fallen by 37.4 per cent.

The report shows that modest yield compression failed to insulate the capital write-downs last year. Yield impact, which measures the influence yield movements has on capital values, was 1.5 per cent over the year compared to -17.8 per cent in 2009.

The increased risk premium in the commercial property market is reflected in the 9.2 per cent income return recorded last year – the highest in the 16-year history of the SCS/IPD property index. Income returns rose from 7.7 per cent in 2009, corresponding with a further steep fall in capital values in 2010.

Phil Tily of IPD said falling rents almost entirely explained last year’s further steep capital depreciation, with the influence of yields on values modest.

Dr Peter Stafford of the Society of Chartered Surveyors said the 2010 figures showed that while the greatest shocks to the market were hopefully behind us, continued weak investor confidence and the poor macroeconomic background in 2010 had led to a stalled market.

At sector levels, retails and offices had the shallowest annual declines in capital growth, both at -10.5 per cent, while industrials saw write-downs of -12.7 per cent. Retail recorded the lowest rental value decline at -16.5 per cent compared to -20 per cent for offices but the sector had the lowest total return at -3 per cent. This was due to a smaller income return of 8.3 per cent compared to 11.1 and 9.6 per cent for industrials and offices, respectively.

Over 2010 capital values in Grafton Street fell by 8.3 per cent compared to -31.3 per cent in 2009. Henry Street and Mary Street showed the deepest decline of 14.5 per cent compared to -31.6 per cent in 2009. Over the full three years since values have been declining, Henry/Mary Street has slipped by a staggering 70.3 per cent while Grafton Street has fallen by 68.4 per cent.