UK property performance has now trailed the Irish market for the best part of two years. The latest results from the SCS/IPD Index show the Irish market recording a return of 16.2 per cent over the year to September, compared with 7 per cent in the UK.
Despite a number of reports pointing towards a recovery in the UK, it would appear that this is limited, at present, to specific types of property. Central London offices and certain retails are experiencing rental growth, but, in much of the market, rents have stagnated or continue to slide.
The IPD UK Monthly Index for September shows very little evidence of a sustained recovery. Capital values remain flat over the last quarter with rental values edging up by just 0.2 per cent. Coupled with this, yields have changed very little over the three months. Valuers appear reluctant to make any significant adjustments until they have received concrete signs of improved market conditions.
Much of the market is still hampered by the overhang of space from the 1980s development boom. Meanwhile, the presence of over-renting has modified the impact of any rental value growth.
Offices are staging a relatively slow recovery led primarily by central London. Beyond this, there is very little evidence of rental value growth. The relative weakness of the manufacturing sector has meant that industrial rents have also remained in the doldrums for much of the year. Within the retail sector, warehouses are the front, runners, offering four per cent per year faster rental growth than unit shops. They also have an additional 1.2 per cent income return.
The Irish market by comparison offers greater stability and higher returns. All three sectors are performing well in 1996 and the prospects of future growth remain strong. Critical economic indicators underpinning the performance include favourable forecasts for GNP (running between 5 per cent and 8 per cent, according to the CSO), inflation below 2 per cent and interest rates a little over 6 per cent.
In the light of these favourable conditions, there is an increase in development activity. Retails are the main growth area, where key projects include the development at Blanchardstown, the extension at the square in Tallaght and the Jervis Shopping Centre.
Adopting a cautious approach the majority of new developments are pre-let and therefore do not threaten to severely undermine the supple and demand balance.
Ireland's vitality is also evident in the number of international companies seeking to obtain foot-holds in the market by the tax incentives offered in the IFSC and the booming retail trade.
The steady decline in the amount of vacant space is creating upwards pressure on rental values, a trend evident in all three sectors of the market. Meanwhile, the demand for property investments is keeping yields down producing stronger levels of capital growth.
At an aggregate level, rental values have risen by 4.6 per cent over the 12 months to September, contributing to a 7.4 per cent increase in capital values The chart below maps the performance of the three sectors.
Offices hold the advantage in terms of rental growth, but a combination of favourable yields shifts, and relatively high income return ensures that industrials remain the best performing sector of the market. Retails, meanwhile, are putting in steady performance, tracking the index with capital growth of 7.4 per cent.
A return in the high teens would not be an unrealistic target for the Irish market for 1996. By comparison, 8 per cent to 10 per cent looks the likely outcome for the UK.
In summary, Ireland looks set to continue to exert its superiority, the UK property market, providing a close watch is kept on the level of development activity.
