Although the Irish market has gained some momentum, UK returns in the retail, office and espcially industrial markets were better in 2004, reports Phil Tily

Having finished 2003 with somewhat of a flurry the Irish market made a slow start to this year as returns were cut back to 2.0 per cent in the first quarter.

The market has since gained some momentum, with returns improving to 2.3 per cent and 2.4 per cent in the second and third quarters.

A total return of 10.9per cent for the 12 months to September 2004 puts Irish property in a healthier position than a year ago, when the corresponding figure was 8.8 per cent.

Whereas strong returns in 2003 could almost entirely be attributed to a sharp fall in yields, the steady growth in 2004 has arisen from a more balanced scenario of gently falling yields accompanied by gradual rental growth.

Rental trends in Ireland have been solid if unspectacular. Evidence of a strengthening in the economy - talk of a "return of the Celtic Tiger" - has started to feed into the office and industrial markets, where the decline in rental values has begun to ease up.

Overall levels of rental growth have remained positive throughout 2004, based solely on growth in the retail sector.

The slowdown in the rate of decline in yields has been far more apparent. Property yields in Ireland have fallen by 10 basis points in the first nine months of the year, but put into context, this compares with a 14 basis point fall in the final three months of 2003.

A shortage of stock in a market where both institutional and private investors are now competing for property has ensured that yields have continued their fall to record lows in 2004.

But investors, particularly those with access to gearing, are increasingly turning their attentions elsewhere, most notably the UK market, where temptations include favourable yields and far lower transaction costs.

The UK market, which appears to be reaping the benefit of increased investment activity, is currently reporting better returns than Ireland in all three sectors.

With total returns for the year-to-September standing at 17.1 per cent, the UK looks to be on course to outperform Ireland for the third year in succession.

Rising interest rates this year have done little to curb the appetite of investors in the UK and a wave of activity has driven down yields in the UK market in 2004. The UK all property equivalent yield has fallen by 50 basis points so far this year.

As in Ireland, rental growth has remained relatively subdued, with an increase of just 1.2 per cent over the last nine months largely restricted to improvement in the retail sector.

Retail remains the top-performing sector in both countries. While the future is clouded to a certain extent by the talk of a correction in the housing market, consumer spending for now remains strong and demand for space has driven rents up and yields down.

Over the last 12 months, UK retails have delivered returns of 20.4 per cent while Irish retails, arguably of even greater importance to their wider domestic market, have achieved total returns of 19.8 per cent over the same time period.

The fortunes of both the Irish and UK office markets have improved during the course of 2004. To a certain extent both markets have demonstrated similar themes; a continued - albeit slowing - drop in rental values, coupled with reductions in yields.

There is little to choose between the two markets in terms of rental value growth, but offices in the UK currently have the upper hand a results of larger yields reductions.

The industrial sector- so often the bridesmaid of the UK property market - has not missed out on the improvement in returns.

Total returns on UK industrials over the 12 months to September 2004, at 17.7per cent, have benefited from a fall in yields comparable with that seen in the UK retail and office sectors, as debt-backed investors have competed fiercely for properties in all three sectors of the market.

Irish industrials over the same time period have reported a much lower 7.0 per cent return - a figure that is largely income based.

Looking forward, year-end results for Irish property should remain in double digits if the gradual recovery in performance is maintained.

But Ireland does look set to be upstaged by the UK market, where the latest re-weighting of the IPD monthly index estimates all property total returns of 17.2 per cent in 2004.

Further comparisons between the two markets are available on a quarterly basis in the IPD Irish quarterly review, a new product to be launched next year - for further information please contact Phil Tily.

• Phil Tily, head of IPD international services