Irish commercial property – a continuing decline in Q4, 2010 with the pace of decline picking up

Jones Lang Lasalle (JLL) has published its commercial property series for Ireland for Q4, 2010 (free registration required). The JLL series is one of the two Irish commercial indices referenced by NAMA’s Long Term Economic Value Regulations (Schedule 2) and is used to help calculate the performance of NAMA’s “key markets data” shown at the top of this page. The other quarterly Irish price series is published by SCS/IPD but because it is generally published after JLL’s it is not used here but the index does historically show a close correlation with JLL’s.

The Index shows that capital values are continuing to decline and the pace of decline is picking up. The Index declined by 3.0% in Q4, 2010 compared with Q3, 2010. Overall since NAMA’s Valuation Date of 30^th November, 2009 prices have declined by 11.7%. Commercial prices in Ireland are now 60.2% off their peak in Q3, 2007. On an annual basis prices are down by 10.5%. The NWL index is now at 897 which means that NAMA needs to see a blended increase of 11.5% in property prices across its portfolio to break even at a gross profit level (taking into account the fact that subordinated bonds will not need be honoured if NAMA makes a loss).

In terms of commercial components, Retail was down 3.3% in the quarter, Office was down 1.8% and Industrial was down 6.7%. JLL are, perhaps not surprisingly, upbeat about the figures saying that the 3% decline in Q4 is the smallest quarterly decline since 2007 – in fact they are talking about Q4 declines and I am not sure there is any seasonality to Irish commercial property prices. In 2010 prices declined as follows : Q1 (2.1%), Q2 (4.7%), Q3 (1.1%), Q4 (3%).

Quarter 4 was a momentous quarter in Irish economic history with an IMF bailout being rumored from mid-November and confirmed on 28^th November. The two largest potential deals in Q4 seem to have fallen through (1) the €110-120m Royal Liver portfolio sale to TPG Capital/Green Property and (2) the €350m Liffey Valley Shopping Centre sale. In the first case the IMF bailout was blamed.

JLL report that rents fell by 5.6% in Q4 (ERV index of 645 versus 683 in Q3) which represents a slight pickup in the rate of decline in rents and the annual decline in rent is still 24.3%. With rents falling with 20%+ per annum and capital values still dropping the 8.67% yield currently available on Irish commercial property is, contrary to what JLL assert, not particularly attractive.

The outlook for 2011 is challenging. Hopefully NAMA and non-NAMA banks will bring more product to market. There should be some stabilization in the overall economy though domestic demand is likely to decline. Credit for Irish property is still scarce though there are reportedly pots of €10m available for quality assets with reliable rent rolls. The prediction on here is that capital prices will decline 10% this year.

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