For the investor in the residential property market, time falls into two periods - the glory days before Bacon and the leaner period which followed.

During the glory days, investors flooded into residential property, snapping up 80 per cent of all apartments in certain inner-city developments. But this was brought to a sudden halt last April following the implementation of recommendations of the Bacon report which was aimed at cooling the property market.

It targeted investors because it believed they were effectively pricing owner-occupiers out of the market by purchasing up to 30 per cent of all new houses in the Dublin area. Investors were forced to withdraw from the market, tail between their legs.

The specific measures which hit investors were the introduction of stamp duty on new properties bought for rental purposes, the abolition of Section 23 tax incentives and changes in legislation which meant investors could no longer offset their rental income against mortgage interest payments on properties purchased after April 23rd, 1998. The latter measure in particular contributed to the virtual elimination of all but the cash investor from the market by reducing returns by 46 per cent overnight.

Ms Jackie Gilroy, head of commercial lending at EBS Building Society, says borrowings by residential investors slowed to a trickle after the new housing measures were introduced. Investors accounted for as much as 30 per cent of all mortgage lending before April but now make up a negligible proportion, she says.

However, there are tentative signs that the residential investor may be creeping back out of the shell to which he retreated following publication of the Bacon report as a combination of rising rents, falling interest rates and stabilising property prices tempt some back into the market.

In addition, an investment climate marked by extreme stock-market volatility and very low rates of return for cash deposits has encouraged many to look again at property, the most tangible investment of all.

"In the last two or three weeks, investors have been creeping back into the residential property market," says estate agent, Mr Ross McParland. "But now they are looking very discerningly at each project to make sure it's right."

Investors are increasingly inclined to visit the site of a prospective purchase, as well as to do their sums very carefully, where before many were happy to make multiple purchases site unseen.

Short of further legislative changes, returns will remain far short of those of the pre-Bacon days but falling borrowing costs and rising rents could go some of the way towards offsetting the impact of the recent tax changes on the residential investor.

Mr Richard O'Sullivan, manager of Christies Lettings, says that in the last year alone rents have increased by as much as over the three previous years combined. He says that a purpose-built apartment in Dublin now costs £500 a month on average while tenants would be hard put to find a two-bedroom apartment for less than £650 a month.

The increasing presence in the market of corporates seeking rental accommodation for employees has driven prices higher while the growing number of those unable to afford houses and forced to continue renting has also added to the pressure. However, property market watchers caution that we are in the peak letting season at present as students return to college and go about finding accommodation. Prices may settle back later in the year.

Rental returns currently average 5-7 per cent, better than the income stream associated with many other assets. But rental income is now taxable while maintenance and management costs also have to be factored in if the investor does not want the hassle of fielding midnight calls from tenants about broken washing machines or leaking taps.

Capital appreciation remains the key attraction in property investment and although property has certainly delivered on this front in recent years, it remains doubtful that the market can continue to grow at such a rapid pace.

Average new house prices across the State have risen from £55,037 in 1993 to £95,885 in the second quarter of 1998, an increase of 74 per cent, according to figures published by the Department of the Environment. Secondhand houses have gone up by an even larger amount, increasing 94 per cent from £52,559 five years ago to £101,985 last quarter while in Dublin, a second-hand home will set the purchaser back by an average £134,037.

But for those who expect values to continue to rise, even at more modest levels, property may be worth considering again in light of the healthy state of the rental market and the prospect of even lower interest rates as the single currency approaches. In addition, property allows investors to "gear up" as lending institutions are usually happier to lend for such an investment, secure in the knowledge that they have the property itself as collateral.

"We're a bricks and mortar people. We always have been and I think we always will be," says Mr McParland.

However, some financial advisers remain lukewarm about the attractions of property as an investment now that the significant preBacon tax advantages are gone. Mr John Crowe, director of KPMG, points out that property is among the most illiquid of assets and should only be viewed as a long-term investment. Transaction costs are also considerably higher for property than for most other investments with stamp duty and legal costs among the more obvious expenses faced by would-be investors.

Advisers also caution would-be investors against putting all their eggs into one basket, while warning that there may now be a mistaken view out there that property values will never stop rising.

Britain provides a salutary example in this regard. During the property boom of the late 1980s, many believed property values would only rise or plateau and never fall, only to find themselves a few years later in a negative equity situation as their properties were worth less than their borrowings.

Although the demographic situation in the Republic means few people expect the market to run out of steam in the near future, Mr Crowe questions how much good value is left in the market.

Unless investors can buy a property which they can be sure of renting and which will always cover their debt costs, they might be as well off considering other forms of investment, he says.

Moneymaker will examine investment in commercial and overseas property in future weeks.