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Commercial Property Investments Continue to Bring Improving Returns

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Commercial Property Investments Continue to Bring Improving Returns

By - Wednesday 18 May 2011

A wealth of data on commercial property in 2010 shows a strong recovery in the sector. The recovery is severely fragmented, with some countries seeing capital growth, some seeing incomes increase, and almost all seeing rents either stagnant or falling. One thing that is nearly constant however is a strong growth in investment returns.

The IPD has issued reports on many countries' performance in 2010:

Investors in UK were best off with returns of 15.1%. Their counterparts in Central and Eastern Europe enjoyed euro-denominated yields of 3.1% in 2010 according to the IPD index of the region. French commercial real estate returned 10%, Italian 5.2%, Swedish 10.4% and even Spanish commercial property turned positive; its 4.6% returns a massive improvement on the 9.3% contraction recorded in 2009.

Going further afield the US was on top with returns averaging 14.2% in 2010, Canada commercial property returned 11.1%, and Korea 6%.

Some countries saw growth driven by capital value appreciation, some from rising rents, some from rising incomes, and some from a combination of two of the above, very few if any saw positive figures in all three. Irrespective of the fractures and irregularities in the recovery 2010 has to be called a year of recovery in global commercial real estate.

Early indicators suggest that this recovery could continue into 2011. Many experts expect growth to slow in those places where growth was remarkably strong in 2010, i.e. the UK, US, Canada et al, but for potential the same remarkable growth in markets that are yet to see any such recovery.

Ireland would certainly be a candidate for that title. Irish commercial real estate returns contracted 2.4% in 2010. This is a dramatic improvement on 2009 23.3% contraction, and therefore a recovery of sorts, but not the kind of growth being seen in some markets in 2009 and many markets in 2010, giving it potential to see that kind of growth this year.

According to the first reports this year it got off to a good if not wonderful start in Q1. With returns of 0.0% Q1 2011 is the first quarter that Irish commercial property returns have not contracted since Q1 2010.

Unfortunately looking at the report in depth makes it hard to maintain any such optimism. The only reason that returns turned positive was because the rate of decline slowed across the board. Capital depreciation slowed to -2.3% from the -3.3% decline recorded in Q4 2010, and rents only fell 3.4% in the first quarter, compared to 4.9% in the fourth quarter of 2010.

So it doesn't look like Ireland will be the poster boy for commercial property investment, at least not in 2011. However, while reports do suggest a slowdown in growth in the hottest performers of 2010, there is still plenty of room for growth in rents and capital values in markets across Europe, Asia and around the world.

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