Overall returns likely to break 25% as surveys point to fall

Overall returns from commercial property remain buoyant and are likely to exceed 25 per cent for the full year

Overall returns from commercial property remain buoyant and are likely to exceed 25 per cent for the full year. This compares with 39 per cent in 1998, the sixth year in a row which the market performed strongly.

Two reports published today show property is continuing to out-perform bonds or equities.

The London-based Investment Property Databank (IPD) puts the all-property return for the three months to September at 6.3 per cent. Jones Lang LaSalle's index is more upbeat, reporting returns of 7.1 per cent in the same period.

IPD attributes the small drop in returns to a slowing in rental value growth. During the third quarter, rental values rose by 2.9 per cent, compared with a peak growth of 5 per cent in the fourth quarter of 1998. On an annualised basis, rental value growth has been slowing through 1999, standing at 14.7 per cent for the 12 months to September.

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At the all-property level, equivalent yields have again shortened, falling by 0.14 points over the last three months - almost identical to the drop in the first two quarters. The drop over the nine months now amounts to 0.41 per cent. Industrials were the only sector to experience a significant change in returns in the third quarter - falling 2.1 points to 5.1 per cent. Retails, with a return of 5.2 per cent, moved ahead of industrials but continued to lag behind offices, which posted a return of 7 per cent. The fall in the industrial return was the product of rental values remaining virtually unchanged over the quarter. On a 12-month basis, a gap of 15.4 points now separates the three sectors of the market, according to IPD. Retail returns fell to 25.2 per cent over the year to September, moving further adrift from the other two sectors. Offices, with a return of 40.6 per cent, maintained their position as the best-performing property type.

Jones Lang LaSalle says that although the 1998 overall return of 39 per cent cannot be repeated, it appears likely that annual returns will be at least 25 per cent. This assessment is based on a strong capital growth, with values rising by 6 per cent across all sectors in the third quarter. Capital values rose by 18 per cent in the year to date, with the strongest growth in the office sector where values have increased by 23 per cent in the year to date.

Jones Lang reports a sharpening of investment yields, although the pace of change is generally slower than in 1998. The cost of borrowing and bond yields will eventually put a floor on the level to which prime yields can fall. The retail and industrial sectors have seen similar growth in capital values in the year to date (11 per cent) but the last quarter was stronger for shops (5.3 per cent) than for industrials (2.6 per cent).

Rental values have risen in the portfolio by 4.2 per cent during the third quarter and by 12.4 per cent in the year to date. The most marked increase was again in the office sector, where rental values rose by 4.9 per cent in the last quarter and by 17.3 per cent in the year to date.

Top-end prime rents continue to escalate in the market place, and this is filtering down to older, second-generation space, which is also experiencing low vacancy. The agency says the supply situation is expected to ease somewhat next year and rental growth is likely to slow.

Jones Lang says retail rental values are performing strongly with 4.1 per cent growth in the last quarter and 7.6 per cent in the year to date. Industrial rents have grown 2.4 per cent in the year to date.

Jack Fagan

Jack Fagan

Jack Fagan is the former commercial-property editor of The Irish Times