Returns show 1.7% improvement during 2012

Though capital values are continuing to fall in the Irish commercial property market, overall returns have now been positive for the last five quarters and showed an improvement of 1.7 per cent during 2012 as a whole.

The Irish Property Index published by Jones Lang LaSalle calculates that capital values declined by 8 per cent over the past 12 months but this was overshadowed by income growth which reached 9.7 per cent.

Values have continued to slip in all three sectors of the market, none more so than the retail sector which fell by 2.2 per cent in the fourth quarter and by 9.7 per cent in 2012.

Industrial properties were down by 1.5 per cent between October and December while office fell by 1.2 per cent.

Researcher Hannah Dwyer says the retail sector continues to face major challenges in terms of consumer sentiment, limited demand and decreasing rents.

Rents had dropped significantly since the peak and with continued falls in the last twelve months “they appear to be a long way from growth”, she said.

The news that capital values are continuing to decline across all three sectors of the market will not surprise many given that there has been widespread over-renting not only in the office sector but on high streets and in most of the leading shopping centres in cities and towns across the country.

An example portfolio used by Jones Lang LaSalle for compiling the index suggests properties are over-rented by 32 per cent – equating to a formidable €7 million in rent per annum.

Margaret Fleming, international director of investments at the agency, is forecasting that income will “trend down” as existing long leases with above-market rents come to an end.

Growth in rents was unlikely to counter this and over-renting would remain an issue, although the gap may narrow somewhat.

“The erosion of this historic high rental income will continue to affect capital values on an annual basis, effectively eliminating portions of value from the capital value index and portfolios every quarter,” said Ms Flemming.

“For example, while there is evidence that prime rack-rented office values have stabilised in the last few quarters and even improved a little based on recent transactions, such properties do not make up a significant portion of the investment market and therefore do not impact on overall results.

“It will be important to monitor both trends in the coming years.”

With sales transactions in the commercial property market now about to take off again after the Christmas break, dealers will be well aware that capital values are now 67 per cent lower than at the peak in the third quarter of 2007. Trading opportunities have never been so attractive.