A dramatic period of repricing is firmly underway with more steep falls to come, writes Jack Fagan
CAPITAL VALUES in the commercial property market are still in freefall with the latest property index showing a slippage of 15 per cent over the three months to the end of September.
It was the fourth successive quarter without any rise in capital values and, according to investment experts, values will have to fall even further before the sale of commercial properties can resume. The London-based Investment Property Databank also report that the overall returns for the first nine months of this year are in negative territory (-21.1 per cent) - so all the gains accrued since September 2006 have now been wiped out.
The findings show that for the third successive quarter the combined sectors of the commercial property market produced negative returns, falling by 13.9 per cent in the three months up to the end of September - more than double the 6.2 per cent slippage reported in the second quarter.
What IPD described as "marginal insulation" was provided in the third quarter by the highest quarterly income return since Q1 2006, at a modest 1.2 per cent.
The latest study also showed that all property yields contracted for the fourth consecutive quarter. Over the three months to the end of September, the detraction was -15.4 per cent, forcing down the three-year annualised yield impact into a negative position at -2 per cent compared with 4.4 per cent at the end of the second quarter.
All property equivalent yields, which compare investment valuations across different market segments in any one year, have risen to their highest level since Q1 2005, and now stand at 5.5 per cent. The appalling performance by the Irish retail market, especially the fall in capital values, will set warning bells ringing throughout the industry and undoubtedly lead to the postponement of several new shopping centres and even more extensions. IPD calculates that total returns on the all-retail index in Q3 fell by a significant 17.3 per cent, due in large measure to a slippage of 18.1 per cent in capital values.
The scale of the losses in Q3 have pushed down the three-year annualised total returns to 3.8 per cent compared to 12.6 per cent for the equivalent figures for the end of June. The capital value of offices fell by 13 per cent and for industrials by 10.1 per cent.
Angela Sheahan, IPD's head of indices, said these numbers confirm the losses expected by the market for several months. "This dramatic period of property repricing has been underway for some time, predicated by a widening gulf between investor confidence and real estate fundamentals."
John Moran of Jones Lang LaSalle said a significant amount of repricing had already taken place but there was more to come. The scale of any further downward adjustment would be driven by the state of the current financial crisis and the occupier market.
Interestingly, Jones Lang LaSalle, which normally releases its own Irish Property Index at least a week before the quarterly IPD findings, indicated that it is hoping to finalise its figures this week. "It is not ready to go out yet," Dr Clare Ericsson, head of research, said. "We are reviewing some figures and clarifying some."