Irish commercial property delivered total returns of 24.3% in 2005, according to the SCS/IPD Irish Index, ahead of equity returns at 21.7% and bonds at 8.0%. This is the highest level of total return since 2000, and is roughly double the 12.7% and 11.5% recorded in 2003 and 2004 respectively. Income return dropped to 5.3%, with the surge in returns totally reliant on an 18.1% increase in capital values. Rental values grew by 3.4% at the all property level, while a 74 basis point fall in the all property equivalent yield added 15.1% to capital values.
Table 1 Irish and UK Commercial Property Returns, 2005
Source: SCS/IPD Irish Index, IPD UK Monthly Index
This pattern of performance was similar to that seen in the latest figures available on the UK market. Here, commercial property (measured by the IPD UK Monthly Index) delivered total returns of 18.8% in 2005. Capital values rose by 12.2% at the UK all property level in 2005; a 69 basis point fall in yields boosted capital values by 11.5% which easily out-weighed a 2.6% increase in rental values. In common with Ireland, property out-performed bonds (at 7.4%), but unlike Ireland UK equity returns, at 22.0%, were superior to property returns.
Ireland and the UK also displayed similar patterns of performance at the sector level. In both countries, retail
enjoyed another year of dominance, office returns improved considerably on lows in 2004, and industrial returns were once again solid if unspectacular.
Irish retail returns climbed to 27.4% in 2005, their best performance since 1998. Returns on retails in Grafton Street, at 30.3%, were higher than those in Henry / Mary Street, at 19.1%, for the fourth year in succession. Rental values rose by 15.9% on Grafton Street compared to an increase of just 2.8% on Henry / Mary Street. Total returns on shopping centres and retail warehouses were more-or-less identical, at 28.4% and 29.0% respectively.
Overall, office returns in Ireland climbed to 23.7%. In Central Dublin, total returns on Dublin 1, Dublin 2 and Dublin 4 were fairly similar, at 27.4%, 24.7% and 25.5% respectively. These three areas have shown the same pattern of relative resilience and resurgence during both the recent downturn (which can be defined as the period from June 2002 to the end of 2004) and this years upturn. During the downturn, rents in Dublin 1 fell by 0.8%, but larger falls of 2.9% and 6.2% were recorded in Dublin 2 and Dublin 4. In 2005, Dublin 1 saw a 1.3% rise in rental values, compared with a 0.9% increase in Dublin 2. Dublin 4 rental values were unchanged throughout 2005. Dublin 1 has been rewarded for this improvement in the form of a 110 basis point decline in the equivalent yield Dublin 2 and Dublin 4 have seen gentler falls of 88 and 99 basis points respectively.
In the industrial market, South East Dublin industrial returns stand out, at 35.2%. In 2005 these properties have benefitted from a 7.0% rise in rental values and a 105 basis point fall in the equivalent yield which may in part reflect a degree of anticiaption of future capital uplift should a change of use (e.g. to retail or residential) occur. Returns in South West Dublin and North Dublin have been less impressive at 14-15%; rental values have remained static, while equivalent yields have declined by just under 50 basis points.
Looking forward to 2006, one key area of uncertainty will be whether the office market can continue its recovery and achieve rental growth in excess of the rate of inflation for the first time since 2001. In the UK, the recovery in the Central London office market seems to have stalled, as the over-hang of supply dampens the market; City rental growth is barely positive, while in the West End the rate of rental growth was fairly constant at 2-3% throughout the whole of 2005. It remains to be seen whether Irish office rental gr