MarketReturns: The property market has enjoyed its best performance since the last quarter of 2000. Jack Fagan, Property Editor, reports.

The pick up in returns from the Irish commercial property market continued in the third quarter of 2003.

All property returns for the three months reached 3.6 per cent - up from 2.6 per cent in the previous three months - largely because of the strength of the retail sector. It was the best performance since the last quarter of 2000.

Figures from the SCS/IPD study show that property continues to outpace the bond market, which was stagnant during the latest quarter, but fell short of equities, which continued their revival with returns of 5.4 per cent.

The strengthening of the market is underlined by an 8.8percent return for the year, which compares with a corresponding figure of 3.2 per cent for the 12 months up to September 2002.

The brighter picture emerging for commercial property comes at a time when a number of institutions are offloading some older properties to reduce their property weightings after heavy losses on the equity markets.

The rebalancing of these portfolios has already thrown up some interesting properties for private investors, who continue to be the main buyers in the Irish market.

The SCS/IPD index shows that rental value growth in all commercial sectors during the last quarter reached 0.8 per cent, comparing favourably with the opening six months of the year. Equivalent yields continued their downward trend, falling for the fourth quarter in succession, down seven basis points. Capital growth of 2.2 per cent combined with a 1.4 per cent income return produced the highest quarterly return since the final period of 2000.

The retail sector continues to deliver impressive returns, up three percentage points on the last quarter.

Although retail remains the driving force within the market, it has been supported in the last three months by gains in the office sector, where three-month returns rose to 2 per cent.

Retail returns rallied to 7.2 per cent during the September quarter. Capital growth of 6 per cent was almost equal to the gains reported by this sector in the opening six months of the year.

This was based upon a 3.3 per cent rise in rental values and a significant 14 basis point reduction in yields. Shopping centres emerged as the best performing retail property type with a return of 10.2 per cent for the quarter.

Despite all the doom and gloom about the property market, returns improved for the third office quarter in succession.

Capital values rose by 0.4 per cent over the three months despite a 0.1 per cent decline in rental values.

Capital growth within this sector of the market can primarily be attributed to an uplift in rental income, a number of rent reviews having been settled during the period. This was accompanied by a slight but nonetheless favourable movement reduction in yields.

In direct contrast, the index showed that the industrial sector of the market began to lose momentum in the third quarter of 2003. Capital values fell by 0.5 per cent, responding to a 0.1 reduction in rental values and an adverse three basis point rise in yields.

Annual returns emphasise the one-sided nature of the market. Retail returns at 22.1 per cent per annum continue to overshadow the office and industrial sectors where returns are only a shade in excesss of 3 per cent.