Returns for investors across all sectors of Irish commercial property could slow to a growth rate of between 7pc and 10pc in 2017, down from 12.4pc in 2016 and only about a quarter of the 36pc level seen during the lift-off in recovery seen during 2014.
Nevertheless, Ireland looks set for another year of relative global outperformance.
These were among the findings of recent surveys undertaken by MSCI, which publishes the authoritative monitor of the Irish property industry, the IPD/SCSI property index.
In MSCI’s survey of about 150 experts in the Irish market, as many as 47pc of them expect returns of between 7pc and 10pc for the index in 2017; 26pc of respondents expect returns of between 5pc and 7pc, while 12pc of the experts forecast returns of between 10pc and 12pc.
Over the medium term to December 2019, 45pc of respondents forecast 5pc to 7pc total returns for the IPD Ireland annual property index; 26pc forecast a 3pc to 5pc return and 12pc expect a 7pc to 10pc return.
A surprising result showed that student housing emerged as their favourite choice for investment, with 24pc of respondents saying this was their pick to buy for a three-year hold.
MSCI undertook the survey at its presentation last Thursday in the Westbury Hotel in Dublin.
Equally surprising was that the retail and office investments, which had been the favourites among trophy hunters during the boom, have fallen dramatically and are now ranked as the two least popular choices.
Retail attracted only 7pc of those punters and offices 9pc. It’s not known how the composition of the audience gathered at the Westbury Hotel affected those responses.
What are now considered alternative property sectors also proved more popular than the two pillar sectors of the industry.
As many as 16pc are opting for large-scale residential rental investment; 15pc for healthcare and 11pc for hotels and leisure.
Industrials, a sector which is often referred to in the trade as ‘sheds’, proved second most popular with 18pc of the vote. This support for industrials tallies with their market performance in 2016.
Sasha Thomas, senior associate MSCI, says industrials received proportionately more of the investment in 2016, accounting for 11.69pc of the industrial sector’s capital value while office investment accounted for only 8.09pc of the office sector’s capital value.
Furthermore, industrial saw the strongest rental growth, up 10.57pc compared to 7.48pc for offices and 6.67pc growth for retail. Industrials’ performance was also reflected in returns as they achieved the highest total return in 2016 at 19.3pc followed by retail 12.9pc and offices 11.9pc.
“Within those the top-performing segments were North Dublin industrials, central retails and Dublin 4 offices,” Thomas adds.
MSCI’s survey of 444 properties across the retail, office and industrial sectors, valued at €8.4 billion, showed 4.7pc income returns and 7.4pc capital growth in 2016.
Meanwhile, the smaller JLL Index released this week shows even stronger returns of 13.6pc in the full year.
JLL reports that capital values increased by 2.4pc in the last quarter and 7.8pc over the year. This was driven by growth across all three sectors, with Industrial up 17.9pc; followed by retail 7.2pc and offices 6.5pc.
Hannah Dwyer, JLL’s head of research in Dublin, said that overall capital values have increased by 78.3pc since the bottom of the market but still remain 41.4pc lower than the peak in Q3 2007.
Rental values across the entire JLL Index portfolio increased by 4.1pc in the last three months and 10.6pc in the last 12 months. Office rents had the greatest increase in the year, up 14.1pc followed by industrial 7.8pc and retail 6.2pc.
Ms Dwyer points out that good returns are still available for investors as the 13.6pc returns for 2016 are in line with the 13.2pc long-term annual return for the JLL Index since it was launched in 1974.
This is yet another indicator that properties are not overvalued at current prices.
“In 2016, initial yields of all three commercial sectors in the JLL Index experienced compression with the overall down from 5.4pc to 5pc. In particular, the initial yield for the industrial sector has compressed from 7.1pc to 5.6pc in the last 12 months. The industrial sector had a particularly strong year, with growth in values and returns, which are being driven by strong fundamentals in the occupier market,” she added.
Meanwhile Marie Hunt, director of CBRE Ireland, expects to see continued appetite for Irish real estate from core buyers throughout 2017, with the biggest challenge being a scarcity of prime product to satisfy the volume of bidders.
She expects total returns, rental growth and investment spend volumes to be lower in 2017 than last year.
Prime yields are expected to remain stable this year but CBRE believes that there will be some upward pressure on secondary yields.
Nevertheless she agreed that rising rents in the prime industrial and retail sectors could see capital values continue to rise in those prime sectors.
The MSCI survey also showed that over the five-year period to September 2016, Irish commercial property outperformed both equities and bonds. During the most recent three years commercial property achieved annualised returns of 25.2pc compared to 13.5pc for MSCI’s equity index and 9.7pc for bonds.
While bonds outperformed over the longer 10-year timeframe, Irish commercial property also outperformed equities in that time frame.
MSCI’s Malcolm Hunt said Dublin was one of Europe’s most successful office markets in terms of attracting capital in 2016.
Its €1.2bn in investment, was the second strongest in Europe, surpassed only by Madrid with €2.5bn.
Furthermore, while cross- border capital flows are slowing at a reduced rate across the world, Ireland was the fifth strongest in terms of attracting foreign capital out of 27 markets surveyed.
About 70pc of the €4.3bn Irish investment in 2016 was accounted for by overseas investment.
Mr Hunt also reckons that Irish real estate stands out because initial Dublin yields are not yet at their record lows.
“There are also signs of built-in income growth; cross-border investment remains strong and it looks like another year of relative global outperformance,” he said.
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