Saturday 23 September 2017

Returns positive despite falls in capital values

Donal Buckley

Overall returns for Irish commercial property continued in positive territory in the second quarter of the year despite falls in capital values and rents. For the third consecutive quarter, the Jones Lang LaSalle Irish Property Index showed positive results with a plus 0.1pc overall return during the three months to the end of June.

However, capital values fell 2.3pc, income fell 2.5pc and rental values fell 1.4pc.

Hannah Dwyer, JLLS research analyst, said the performance is particularly disappointing given the positive results for Q1 2012, for which income rose 1.6pc and estimated rental values rose 0.7pc.

In the second quarter, capital values for all three commercial property sectors: offices, retail and industrial, continued to decline, with retail suffering the greatest fall, down 2.9pc, after a 1.0pc fall in Q1. "This reflects the major challenges the sector is still facing," Ms Dwyer adds.

Consistent

Office and industrial capital values fell by 2.3pc and 0.5pc respectively in Q2, which are at a slower pace than Q1 2012.

Rental values decreased for retail by 1.6pc and offices by 1.4pc while industrial rents remained consistent with the previous quarter. Ms Dwyer says that the main driver of the decline in capital values is rental values and fears around occupation, vacancy costs, voids and rental levels.

Explaining how overall returns can rise while values and rents are falling, she said this is possible when the high income yield cancels out the capital loss, leaving a slightly positive overall return. At present the portfolio which forms the basis for the index is generating an income yield of 9.6pc.

'The index results reflect the negative sentiment in the macro-economic environment in Q2. This sentiment seeps through to occupiers and rental values and affects investor confidence. The moves towards a resolution of the Euro crisis may improve sentiment, and a pick up in the volume of transactions could help to stabilise pricing if it occurs in the rest of 2012,' she adds.

Irish Independent

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