Capital values and rents continued to fall in the first quarter of 2011 – but the pace of decline slowed, pointing to market stabilisation, writes JACK FAGAN

OVERALL returns from the Irish commercial property market have finally turned positive again even though capital values and rents continued to fall in the first three months of this year.

The Irish Property Index published today by Jones Lang LaSalle shows overall returns of 0.9 per cent in the first quarter, an improvement on the fall of 1.6 per cent in 2010 and the -19.2 per cent overall return recorded in 2009.

Margaret Fleming, director of investment at Jones Lang LaSalle, says that while capital values and rents for offices, retail and industrial sectors dropped in Q1 of this year, the pace of decline was slower than in previous quarters which may indicate market stabilisation, a positive sign for commercial property in Ireland.

The capital value of commercial property fell by 1.5 per cent in Q1 and by 10 per cent in the year to the end of March.

Overall capital values have now fallen by 61 per cent since the market peaked in the third quarter of 2007.

The industrial sector continued to experience the sharpest decline in capital performance, falling by 1.7 per cent in the first three months of this year and by 16.5 per cent year on year.

Capital values for offices dropped by 1.6 per cent in Q1 and by 9 per cent in the 12 months to the end of March. Retail capital values slipped by 1.3 per cent in Q1 and by 9.3 per cent year on year.

The rate of decline in capital values continued to slow in Q1, with the lowest quarterly capital value decline recorded by the index since Q4 in 2007, with the exception of Q3 2010.

The Jones Lang index shows that rental values across the entire portfolio fell by 3.1 per cent in Q1, reflecting the continuing pressure on occupational markets and attractive inducements being offered to prospective tenants in the current climate.

Rental values for the office sector were hardest hit, falling by 4.3 per cent in the first three months of this year and by 21.3 per cent in the 12 months up to March.

Industrial rents remained constant in the opening quarter despite having slipped the most year on year, with a fall of 34 per cent.

Retail rental values were down 2.4 per cent in Q1 and by 22.8 per cent over the past year.

Income levels in the index also continued to come under pressure with a yearly drop of 10.2 per cent and a quarterly decrease of 4.8 per cent in Q1.

Ms Fleming says the reduction in income could be largely attributable to a continued increase in the number and size of landlord incentives being granted to tenants experiencing trading difficulties, primarily in the form of rental abatements and reductions.

“This clearly shows that landlords are willing to engage and cooperate with those tenants experiencing difficulties, despite some assertions to the contrary.”

Ms Fleming says the reduction in the pace of decline coupled with attractive income yields are positive signs for Irish commercial property.

However, she put on the record that there is a very serious health warning with the index.

She said it must be noted that capital values at Q1 did not allow for the proposed legislation on the abolition of upwards only rent reviews in existing leases.

Should a downward rent review be introduced into existing leases, a fall in capital values of an estimated 20 to 30 per cent may occur.

“There is no way of partially reflecting this potential change,” Ms Fleming said.

“If it occurs there will be a once-off mathematical adjustment reflecting the change in income expectations.

“Further changes to value may also occur as the investment markets respond to the wider effects on contract law.”