Pandemic sees marginal decline in returns on commercial real estate

While Covid-19 continues to pose a significant challenge to the economy generally, the performance of the commercial real estate sector is proving to be surprisingly resilient, judging by the findings of the new annual property index compiled by MSCI in conjunction with the Society of Chartered Surveyors Ireland (SCSI). The index, which traces unlevered total returns of more than 490 commercial property investments with a total capital value of €10.4 billion, was down by just 0.5 per cent in the year to December 2020, notwithstanding the severe impact of the pandemic. This marginal decline in performance comes off the back of six consecutive years in which the index showed strong positive results.

Unsurprisingly, the retail sector has been hit the hardest by Covid-19, with the MSCI/SCSI index showing an overall drop of 15 per cent in returns to the end of 2020. Grafton Street and Henry Street suffered the most, registering declines of 23.3 per cent and 27.2 per cent respectively.

Outside of retail, however, all other sectors with the exception of offices in Dublin 4 (-4.1 per cent) showed positive annual returns according to the index. Industrial/logistics continue to be the shining light for investors with an overall annual return of 8.7 per cent, outlining the continued imbalance between demand and supply in the sector. This was followed closely by residential at 6.3 per cent, with offices trailing behind at 2.7 per cent.

Commenting on the numbers, Declan Bagnall, chair of the SCSI’s commercial agency group said: “What this data underlines is that property is a strong long-term investment class but diversification is key. Retail and hospitality has, unfortunately felt the brunt of this pandemic. But as long as landlords and tenants work together, we would anticipate a bounce back from this sector.

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“The residential sector is a relative newcomer in terms of property investment for the institutions. As with the industrial sector, this has continued to perform strongly and in 2020 represented a bigger percentage of overall investment spent.”

Looking at the decline in returns for the office sector, from 6.2 per cent in 2019 to 2.7 per cent in 2020, he said: “There was always going to be a time-lag effect within this sector as business rapidly adjusted to the working-from-home model. But while there will be changes to the working environment going forward, as we pass the one-year mark in this pandemic, it is becoming clearer that the office will still hold a strong presence in the world of business into the future”.