Dublin office yields are now in line with other European capitals, having been out of step for most of the past eight years. A leading chartered surveyor, Bill Nowlan, at last week's presentation of the Investment Property Databank's (IPD) annual results, said European prime office yields have generally moved a little upwards over the past eight years but the main downward movers were Dublin and Stockholm, where yields fell by 2 and 1.5 percentage points respectively.
This movement would have increased values by about 30 per cent, if nothing else had happened.
On a yield basis, Ireland had been going through a period of "catch up" with other European cities. The most likely reason for this was a combination of losing the traditional links with sterling and with the UK economy and interest rate regime.
It was probably also linked to the country's prosperity, the improved urban environment and Dublin moving in urban ranking to the first division of European capitals.
A further factor was the pressure of private and institutional money trying to get into property. Mr Nowlan said that at a property portfolio level, average yields in Ireland have dropped from 7.5 to 5.1 per cent over the past five years. This has been caused by a re-rating of property as a medium of investment as against equities and gilts. While the bumper returns from commercial property in Ireland for the past year of 37.9 per cent (capital and income) are part accounted for by rental growth, the impact has significantly been from the fall in capitalisation rates.
Ireland's performance was more than double that of the UK and nearly treble that of most other European markets. For 1998, all the figures are not yet in, but Ireland was almost 39 per cent, whereas the UK showed a 12 per cent total return. Other European countries would have been at or below the UK level.
The European property performance, he said, has been unspectacular, particularly over the past years, with an average gross return (capital and income) of just under 9 per cent per annum for industrial and retail and only 3.5 per cent for offices. The best performers were Amsterdam for offices (10.7 per cent), Madrid for industrial (19.7 per cent) and Madrid for retail (19.4 per cent).
The worst performing being Madrid for offices (down 2.2 per cent), Brussels for retail (6 per cent) and Frankfurt for industrial (4.1 per cent). Over a 10-year period to 1999, the Irish figure was 14.9 per cent.
Mr Nowlan said that one of the main drivers in the Irish property market over recent years has been the fall in capitalisation rates, with an associated rise in multipliers. Since 1991, prime office yields have fallen in Dublin from 7 per cent to 5 per cent and prime office rents have risen from £12/£14 per sq ft to somewhere in excess of £20 per sq ft.
By comparison, prime office rents have been falling or have remained static in most European capitals for the past eight years, with only two exceptions, Stockholm and Dublin where rents have been rising - in both cases rents are higher than they were in 1991. In Paris, Frankfurt and Milan, rents are about two-thirds of what they were in 1991.
Mr Nowlan said it was worth noting that the cities with the lowest vacancy rates - Dublin and Stockholm - were also the best performers in terms of returns. It was perhaps a salutary reminder that rents go up in a period of shortage and come down in a period of oversupply.
Summarising the current property scene in Europe, he said it was dull in most cities, gradually recovering in others and Ireland shines out like a beacon. However, property is a cyclical business and the time to buy is when markets are entering their recovery phase.
Most Irish funds have, over the years, looked at the opportunities to invest in continental Europe and some have done so. Those that did have now withdrawn and hold no property in mainland Europe. On the basis of the past few years' performance, they made the right decision. However, the future may be different and an investor would be very unwise to ignore the vast EU property markets, he said.
Mr Nowlan said he believed there are better opportunities in the UK than there are in Ireland. There are none of the tax problems that are prevalent in mainland Europe, and because the UK and Irish legal and property systems are alike, the learning curve is lower. Also, there is no language barrier.
Mr Nowlan said that one of the problems of holding non-Irish property in a fund is that it may hold back the overall fund performance and this affects vital league tables. But there should be a long-term gain. While the UK may be a fine place to invest in the short term, these two islands still represent only 15 per cent of the European population and holding only Irish and UK property represents an un-diversified portfolio.
"This is not a very satisfactory situation in an investment world where diversification and risk spreading are pre-requisites and where equity funds are spread across the globe. The question must be asked: `does it make sense to only hold property in one very small part of the world'? Such a strategy goes against all the rules of prudent investment management."
