MarketOutlook: This could be a record year for commercial property market transactions in volume terms, with turnover expected to surpass the €1 billion mark.

Property continues to outperform other investment markets for the first quarter of 2005, according to a market analysis from Lisney.

The market hasn't reached the €1billion mark since the boom year of 1999, stated Ms Lena Clarke, Lisney divisional director. Turnover for the first six months looks set to reach about €600 million.

"If this materialises, then 2005 looks set to be a record year in terms of market transactions in volume terms," she stated. Volumes are usually higher in the third and fourth quarters so this figure looks achievable, she added.

The IPD/SCS Property Indices first quarter results indicate that property values increased approximately 3 per cent during the first three months compared to 0.6 per cent for the same period last year.

Overall returns from property for the first quarter were 4.5 per cent, which compares well to the 2 per cent for the same period last year. Property outperformed equities, which returned minus 2.8 per cent and bonds at 1.6 per cent.

The year opened with a strong trading market, Ms Clarke contended, which resulted in further yield compression across the board for commercial property.

This was most noted in the office and retail sectors.

"Prime retail remains a priority on many investors' shopping lists. Prime retail property on Grafton Street and Henry Street would now surely secure 3.25 per cent and even lower if offered for sale," Ms Clarke said in the Lisney assessment.

The office sector had been dominating turnover over the last six months, she said. Recent sales indicated that yields had hardened with prime yields now 5 per cent and below.

"The highlight of the year so far is undoubtedly the development agreement/sale and leaseback of a 30,350sq m (326,684sq ft) extension to AIB's Bankcentre head offices in Ballsbridge, Dublin 4," she maintained.

AIB agreed to enter 23-year leases on the three blocks involved on completion of the property in 2008. "The transaction will amount to over €365 million on practical completion with the bank paying an annual rental of over €16 million. The yield is understood to be about 4.3 per cent."

The retail sector remained very popular amongst investors, she said, and has performed consistently since 2000, "primarily as a result of continued rental growth which was absent in the office and industrial sectors".

Limited new development had underpinned values, with the opening of Dundrum Town Centre a significant exception.

"Although rental growth is expected to slow this year, yields have fallen over the last six months, which will ensure yet another strong year for retail in terms of overall growth."

The industrial market remained slack in recent months, she suggested. New buildings are now commanding up to €1,600 per sq m (€149 per sq ft) while some modern units in Sandyford, Co Dublin are reaching as much as €2,500 per sq m (€232 per sq ft).

"Older stock is good value at prices between €900 and €1,130 per square metre," she added. "In our view, prime yields have hardened to 6.5 per cent and may dip below this in the case of very small lot sizes."

The long-term outlook is positive, she suggested. Last year prime retail showed an overall return of 18 per cent.

"We estimate that rents on Grafton Street increased by approximately 30 per cent last year. Such growth is unlikely to be repeated this year."

She believes, however, that the sector will still deliver a strong performance.

She also believes that the office sector is the one to watch for in 2005, with a re-emergence of rental growth likely during the next 12 months, "having regard to the current trend of falling vacancy rates in the city centre".

Lisney division director, Duncan Lyster, discussed investment in the UK and continental Europe over the past months in the company's review. UK commercial property investment reached a record £40 billion (€59 billion) in 2004 with Irish investors contributing about £3.3 billion (€4.89 billion), he said.

"Yield compression drove total returns to 18.3 per cent last year, the fourth year in the previous five that property out-performed bonds and equities," he said.

IPD reported a total return figure of 2.7 per cent for the first quarter of 2005, down from the unsustainable figure of 4.9 per cent for the last quarter of 2004. Cushman and Wakefield Healey & Baker were predicting total returns of 10.5 per cent this year, he added.

The Continental market is increasingly attractive to Irish investors, he said, and this trade is now firmly established.

Targets include existing EU members including Germany, France and Belgium, but also accession and applicant states in Eastern Europe.