Commercial property falls 7.2% in second quarter (Irish Times)

04 November 2011

The decline in commercial property values is gathering pace with the latest property index showing that capital values fell by 7.2 per cent in the three months to the end of June.

The fall in values has been triggered by a sudden collapse in investor confidence and is more than double the 3.3 per cent decline in values recorded in the first quarter of the year.

The London-based Investment Property Databank (IPD) also reports that for the second successive quarter commercial property showed negative returns, falling by 6.2 per cent, the worst performance since the index was launched in 1995.

Retail property, where rental yields are tightest, was most affected by the decline, with capital values down an unprecedented 8.1 per cent in the second quarter of the year. The capital value of offices slid by 7.3 per cent while industrials fell by 2.2 per cent.

The dramatic fall in capital values, in spite of a slight improvement in rental values of 1 per cent across all sectors, is being attributed to increases in yields.

For all commercial property sectors, the increase in yields knocked 8.2 per cent off capital values in the second quarter of the year alone. Average yields increased to 4.6 per cent at the end of June from a low of 4 per cent only six months earlier.

IPD research manager Angela Sheahan says that the repricing of the commercial property sector has been triggered by the credit crunch and reflects "an economy-wide repricing of all risky assets".

The fall in capital values had been widely expected because of a dramatic slowdown in investment activity as a result of the financial uncertainty. The lack of market activity and worsening economic climate has meant that investments in Ireland during the first six months of this year were less than €300 million compared with more than €2 billion in 2007.

Against this backdrop, prime yields have been moving out quite significantly.

Although there have been relatively few transactions in the first half of the year, agents CB Richard Ellis estimate that the value of retail properties on high streets declined 33 per cent between January and July while prime shopping centres fell 26 per cent.

Prime office investments slipped in value by 21 per cent, while prime retail warehousing fell 26 per cent.

AIB is also expecting a significant fall-off in property values, estimating at its half-year results last week that they could fall 30-40 per cent from their peak.

Despite the turmoil in the money markets and the uncertainty over capital values, a number of institutions including Irish Life & Permanent are planning to offload property investments this autumn. Some sales are likely to stem from demands for redemptions from property funds and the rebalancing of portfolios caused by the disproportionate loss of equity values.

The slow pace at which property values are being adjusted down is being blamed on the lack of sales in the sector and the fact that relatively few investments are held by foreign investors who generally respond faster to changes in the market.

The overall 6.2 per cent decline in returns from the Irish market in the second quarter compares with a 2.7 per cent decline for the UK over the same period, according to IPD.

However, over the year to June Irish property has had a better performance, as returns fell 4.5 per cent compared with a 14.9 per cent decline in the UK.

Capital values in the UK fell by 4 per cent in the second quarter, pushing initial yields up from 4.5 per cent to 5.6 per cent.

"That's still only halfway back up towards the initial yield of 6.7 per cent which prevailed at the start of 2003 when the upswing in values began," said Malcolm Frodsham, research director of IPD.