The commercial property market is heading for another bumper year with overall returns for 1998 set to exceed 35 per cent. The previous highest returns of 37 per cent were recorded back in 1978. Two property indexes published today show that the commercial property sector has benefited greatly from the buoyant economy. The London-based Investment Property Databank (IPD) reports that overall returns for the year to the end of September were 35.4 per cent while Jones Lang Wootton's (JLW) index puts the increase even higher at 38.1 per cent.

In line with these findings, IPD recorded a return of 8 per cent in the third quarter as compared to 10.1 per cent by JLW. The divergence between the two studies is accounted for by the relative sizes of the two portfolio samples. IPDs findings are based on a considerably larger sample, a property fund exceeding £1.4 billion. JLWs portfolio of properties, valued at £130 million, has a heavier concentration of high street investments like Grafton Street and Henry Street. The strong performance of retail warehousing has also pushed up retail capital values in the JLW index.

The IPD results show that at a sector level, offices maintained their lead, recording a return of 8.5 per cent. Retails remained close behind with 7.9 per cent while industrials continued to trail in third place. The retail return of 7.9 per cent was virtually unchanged from the last quarter, down just 0.1 of a percentage point. Rental value growth in this sector of the market slowed to 3.1 per cent.

Despite this modest setback, capital growth remained strong at 6.3 per cent, driven primarily by a 0.19 per cent reduction in yields. Retail yields, which had dropped to 6.14 per cent by the end of September, remain the lowest across all three sectors of the market.

Although offices maintained their lead as the strongest performing sector, with a return of 8.5 per cent, this was 1.6 points down on the previous quarter. The slowdown in the rate of return was due to a similar fall in capital growth, from 8.4 per cent (in the June quarter) to 7 per cent (over the three months to September). Last quarter office yields were cut back by 0.21 per cent while rental values rose by 4.2 per cent.

Industrials lagged behind the other two sectors with a quarterly return of 5.9 per cent, a fall of 0.5 per cent on the three months to June. Capital growth (4 per cent) and income return (1.9 per cent) in this sector were below their corresponding figures for June.

Rental value growth also lost pace, measuring a modest 2 per cent for the quarter. Yields meanwhile continued to tighten, falling by 0.14 percentage points.

IPD report that Irish property returns have now topped 8 per cent three times in the last four quarters, contributing to an annual return of 35.4 per cent over the year to September. This is comfortably ahead of the UK market, which delivered a return of 15.4 per cent.

The JLW index shows that the pace of capital growth was 8.8 per cent in the third quarter and 24 per cent in the three quarters to September, 1998. The current yield on the portfolio is at a new low of 4.9 per cent, reflecting the fundamental shift in yields across the property investment market.

Rental values rose by 3.8 per cent in the third quarter of 1998, and by 15.2 per cent in the year to September. This occurred across the board, with office rental values increasing by 17.5 per cent, retail, 14.2 per cent and industrials, 7.6 per cent in the year to September. Margaret Fleming of JLW says the income index was significantly lower, as the incidence of rent reviews created a lag effect on actual rents received. The rise in rental values was still being driven by a shortage of product in offices and industrial and a generally strong retail market.

The JLW index showed that capital values rose most strongly in retail in the quarter, mainly due to the ever-downward pressure on prime high street yields. Retail values rose by almost 12 per cent in the third quarter and by 28.8 per cent in the year to September. In terms of capital growth in the 12 months to September, offices were the top performer at 34.8 per cent, followed by retail at 28.8 per cent and industrial at 16.6 per cent.