The British and Irish commercial property markets are two very different tales – one of doom and gloom and the other one exuding confidence.

These markets, two of the three mature property markets to be most severely re-priced since the credit crunch, diverged from their aligned downward trend last year, showed a new report by the Investment Property Databank (IPD) compiled on the two markets.

While the UK delivered positive annual total returns of 2,2%, fuelled by an almost bullish cumulative 8,8% rebound in capital growth over the latter part of 2009, Irish annual returns remained negative each quarter delivering -23,3% over the year.

The ray of light, as far as Irish investors were concerned, was the easing in capital depreciation across all sectors in the final quarter, despite a weakening in rental growth and continued yield expansion. Irish capital growth, at -4,9%, was the shallowest depreciation since Q1 2008.

As the chart below illustrates, the UK market experienced its first quarterly capital depreciation six months ahead of Ireland, while Britain’s return to positive capital growth began in August 2009. Notwithstanding the five-month recovery, capital values in the UK are still down by -39,2% from their June 2007 high to the end of 2009. By comparison, Ireland’s commercial real estate capital values have more than halved – down -55,6%.

The chart also shows income returns, a function of the relationship between capital values and rents with income returns increasing as capital values fall faster than rental income, have been stable and in line with one another across both markets.

Capital depreciation in both markets was driven first by yield pressure, followed by a weakening rentals growth. The distinction between the two markets are the inflexion points: the twin drivers of negative capital growth – rising yields and falling rents – began to take hold first in the UK, but fell, ultimately, steeper in Ireland.

The UK property market has seen the return of capital growth because yields have begun to compress again and the pace in rental weakening has eased. But the UK is by no means out of the woods yet: rental growth is still falling, while the vacancy rate, measured as a loss of rental income in the Databank and expressed as a percentage, ended last year at 12,1%. By comparison, Ireland’s commercial real estate capital values have more than halved – down – 55,6%.

The chart also shows income returns, a function of the relationship between capital values and rents with income returns increasing as capital values fall faster than rental income, have been stable and in line with one another across both markets.

In Ireland, while yield pressure has softened, annual rental value growth fell by -22,4% last year, driven by weakening in the domestic economy. The impact of weakening rental values on capital values, but is to some extent muted by the length of unexpired leases. – Eugene Brink

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