Jones Lang LaSalle (JLL) has this morning published its Irish commercial property indices for the three months ending 31st December 2012, and unsurprisingly prices continue to decline, by 1.8% in Q4,2012 compared with Q3,2012 and by 8% for the past four quarters which include the effect of the giveaway Budget 2012 when stamp duty was slashed from 6% to 2% and other incentives were offered to commercial property owners. Prices are now down 67.1% from peak and 27% from November 2009, the NAMA valuation date. The report should be available online at the JLL website shortly.
There is some eagerness at JLL to emphasise that the index is a general index covering all 30 properties in its portfolio that are analysed every quarter – 29 might seem like a small sample, but there is a very strong correlation between the JLL index and the 300-strong property SCSI/IPD index. JLL does say that some prices in some subsectors are stabilizing – prime property with new leases – but declines in older property especially with pre-March 2010 leases continues to drag the overall capital values down.
JLL says “It should be of no surprise that the overall capital values continue to decline across all property sectors given the high level of over-renting in existing leases across the market. The example portfolio which is used for compiling the Index is currently over-rented by 32%, or €7.0m per annum. Margaret Fleming, International Director Investments explained that “income will trend down as existing long leases with above-market rents come to an end. Growth in rents is unlikely to counter this and over-renting will remain an issue, although the gap may narrow somewhat. The erosion of this historic high rental income will continue to affect capital values on an annual basis, effectively eliminating portions of value from the capital value index and portfolios every quarter”. Margaret points out the “for example, while there is evidence that prime rack-rented office values have stabilised in the last few quarters and even improved a little based on recent transactions, such properties do not make up a significant portion of the Investment Market and therefore do not impact on overall results. It will be important to monitor both trends in the coming year.””
Rents are down 1.0% in the quarter and 2.2% in the past year and are down by nearly 55% from peak. Because most pre-March 2010 leases in Ireland contained so-called Upward Only Rent Review clauses, older lease tenants may still be paying rents today which are more than double the market rent.
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 SCSI/IPD and will be available on Thursday 24rd January 2013 at 3pm; because it is generally published after JLL’s, it is not used here to help compile the NWL index, but the SCSI/IPD index does historically show a very close correlation with JLL’s.
With the latest release from JLL, Irish commercial property prices have fallen 27.0% since 30th November, 2009, the date chosen by NAMA pursuant to the section 73 of the NAMA Act by reference to which Current Market Values of assets are valued. The NWL Index is now at 782 meaning that average prices of NAMA property must increase by a weighted average of 27.9% for NAMA to breakeven on a gross basis.
UPDATE: 25th January 2013. This afternoon the “other” quarterly index of Irish commercial property prices has been published by the Society of Chartered Surveyors in Ireland and IPD, a group supported by estate agencies. The SCSI/IPD index continues to show a strong correlation with the JLL index, and reveals that in Q4,2012 Irish commercial property declined by 1.5% – compared to 1.8% recorded by JLL. The SCSI decline from peak is now 66.9% – compared to 67.1% at JLL. SCSI/IPD says retail suffered most in Q4,2012 with a decline of 2.2%, industrial by 1.9% and offices by just 0.9%.