Monday 18 December 2017

Property total returns top 8.5pc, beats stock market

Hibernia REIT paid just over €90m or Guild House and Commerzbank House last week as capital values continue to increase in Dublin
Hibernia REIT paid just over €90m or Guild House and Commerzbank House last week as capital values continue to increase in Dublin

Donal Buckley

IRISH commercial property outperformed the Irish stock market in the second quarter of the year with total returns of 8.5pc during the three months from across the commercial property sectors at a time when equities suffered an 8.4pc decline.

Over the longer 12 month period, Irish equities achieved a strong 28.6pc return but property came close with an also strong 26.6pc return.

These are among the findings in the latest IPD/SCSI Ireland Quarterly Property Index, one of the most authoritative measures of Irish commercial property trends.

It shows that the values of Irish commercial property grew by 6.5pc for Q2 2014 which was the highest rate of quarterly price increase seen since 2006, and has been accelerating over each of the last four quarters.

That is stronger than previous estimates by agents JLL which reported that overall commercial property capital values increased by 5pc in the quarter and 19.4pc over the 12 months.

However Hannah Dwyer, head of research at JLL Ireland points out that "Although we are seeing significant increases in annual values, it is worth noting that these have come from a bottomed-out market and overall values remain 60.6pc lower than the peak."

Both IPD and JLL agree that the office sector continued to lead the market in Q2 2014, returning 10.1pc in the last quarter alone. Office values, nationally, have now risen by 22.7pc over the last year, with values right across Dublin offices rising by more than a quarter in the same period.

"Other parts of the Irish market are also now very much in recovery mode. Retail property values have grown by more than 10pc over the last three quarters, after six years of decline, while industrial values are up 2.2pc since Q3 2013," IPD's Colm Lauder adds.

The 12 month return of 26.6pc in the year to June 2014 was also higher than the UK which reached 17.6pc according to the IPD UK Monthly Property Index. Irish real estate also outperformed Irish bonds, which returned 19.6pc over the last 12 months. However rising rents do not augur well for the competitiveness of the Irish economy. A CBRE survey of office markets in Europe, Middle East and Africa (EMEA) shows that prime Dublin office rents have risen to become the thirteenth most expensive across 58 cities. At €430.50 per sq m Dublin prime rents are ahead of all British cities except London where prime West End offices rent for €1,445 per sq m. Furthermore Dublin prime office yields at 5pc are the fifteenth lowest yields, suggesting that Dublin prime offices are the fifteenth most expensive offices for investors in EMEA cities. Zurich yields at 3.2pc are the lowest and London's West End offices are second lowest at 3.75pc.

In Spain, to which Kennedy Wilson is turning its attention, office investments are cheaper as yields for prime offices in Madrid and Barcelona are 5.75pc which is cheaper than the EMEA average of 5.59pc.

Less than two years ago Dublin offices were ranked as low as 37 in the yields table and 30 in the prime rents table. Now Dublin's top 20 rankings underline the need for NAMA to get the finger out and supply more prime offices in docklands in order for rents to remain competitive and to sustain the flow of foreign direct investment.

While CBRE's survey focuses on prime Dublin properties, IPD's survey includes some non-prime properties as well as some outside Dublin.

CBRE's survey indicates that prime Dublin retail and industrial rents also increased. Retail rents increased by 12.5pc to €2,115 per sq m, during the quarter, the first for some time. Consequently Dublin retail rents are restored to eighteenth position in the EMEA league, the same ranking they were at two years ago.

IPD says Irish retail capital values grew 4.2pc over quarter two, due to strengthening investor demand. "Improving prospects for retail consumption and the health of occupier markets lay behind this, reinforced by the fact that the run of 21 consecutive quarters of falling retail rental values finally ended in Q2 2014," it adds.

CBRE's survey shows prime Dublin retail yields have narrowed to 4.75pc moving them up the EMEA rankings from 33 two years ago to 23 in Q2 2014. These retail trends augur well for the efforts of NAMA and other banks selling more retail properties during the next 12 months. On the other hand IPD says that despite many Irish economic indicators looking increasingly positive, "personal consumption has thus far proved sluggish; however retail investors look to be expecting an improvement."

Mr Lauder says that while returns from Irish commercial property are starting to rival 2006 levels today's "capital values are rising from a much lower base, with equivalent yields averaging 7.3pc at the end of June 2014 compared to 4pc at the height of the last boom. At the same time market rents are now moving ahead after a long period of economic stagnation as hard-earned fiscal reforms inject confidence in the Irish economy."

The traditionally weaker industrial sector has also recorded higher capital values and IPD estimates these at 1.7pc in Q2 which it says is the strongest quarterly growth for the sector since June 2007.

"As in the retail sector, Irish industrial rental values were however static on balance in the first half of 2014, with positive economic indicators slow to percolate through into occupational demand," it adds.

On the other hand CBRE shows that prime Dublin industrial rents rose 3.3pc to €62 per sq m, and despite the increase, these properties have improved their competitiveness ranking as they dropped two places to 28 in CBRE's EMEA league.

Despite prime Dublin industrial yields contracting from 9.5 pc two years ago to 8pc this year, they are also looking very cheap as CBRE's EMEA league ranks them above the 7.61pc average yield and places them at 29 which is in the bottom half of the table.

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