Based on agents’ prime rent and yield data - Capital Economics (CE) estimate that Irish commercial all-property capital values have fallen by a 72.5% from their peak in Q4 2007 – more than double the fall seen in any other euro-zone market.

While most other markets in Europe have seen some degree of rebound, the continued falls in Irish rental values mean that capital values, alongside those in Greece, are still deteriorating and that commercial property prices may yet fall a little further.

On a more positive note CE say that the correction in Irish property yields appears to have now run its course, having increased by 370bps from their low of 3.4% in Q4 2007 to a high of 7.1% in Q4 2009, and have now stabilised. Irish property yields are currently about 190bps higher than German property yields and about 475bps higher than 10-yr Bund yields with only Greek property offering a larger spread over bonds.

Declining property rental values are likely to continue to impact negatively on capital values in the near-term. Although, at the all-property level, they have already fallen by 42.5%, there has been no sign of a slowdown in the pace of quarterly falls. Indeed, they decreased by 8%q/q in both Q1 and Q2 this year. As such, CE say there is clearly some momentum left in the adjustment and suspect that the floor for rental values must be getting close, and we have pencilled in a further fall of about 5%.

Accordingly, CE also believe that the floor for Irish capital values is also approaching. However, given the still very weak economic outlook, they suspect it may be several years yet before occupier demand has recovered sufficiently to reduce the volume of under-utilised stock and drive any rental growth.

The latest Irish GDP data for was disappointing and showed a fall of 1.2% in Q2 and the economic outlook in Ireland remains weak. In terms of domestic demand, the high level of private sector debt, the need for further austerity measures, tight credit conditions and the fact that unemployment is still rising, are all weighing on the prospects for any economic recovery.