Market Trends: Property markets continue to grapple with difficult trading conditions as they struggle to reach some equilibrium, according to a mid-year review. Demand drives some sectors, including development land, commercial and the investment market, while oversupply still dogs the office and industrial markets.

A comprehensive Lisney review of market performance over the past six months sees investment opportunities and quality development land in short supply, the industrial market continuing to languish, and significant oversupply, particularly in the Dublin suburbs.

The company also comments on the "dampening effect" that the Government's nine per cent stamp duty continues to have on the market.

Demand for commercial property investments remains "exceptionally strong" the Lisney review suggests. "However the severe scarcity of investment opportunities available in the Irish market has limited activity so far this year."

Investor confidence remains strong given low interest rates, low unemployment and moderate inflation, but lack of product is making things difficult.

Demand has intensified in 2004 with the return to the market of a number of pension and property funds, a move that has taken more property out of the picture for other investors. "These funds are not actively disposing of properties from their portfolios and this is restricting supply," Lisney maintains.

Turnover in 2003 reached €900 million, but the current lack of product is holding back turnover. Six month figures as a consequence are down by 20 per cent on the same period last year "with the level of turnover in the office sector down and turnover relatively evenly spread between the office, retail and industrial sectors". In turn this is underpinning property values and sharpening prime yields.

For all that, property continues to show positive returns, the report notes. The latest SCS/IPD Irish Property Index for the first quarter of this year shows that retail is maintaining its position as the best-performing sector with a total return of 3.1 per cent. This compares with 1.4 per cent and 2 per cent for offices and industrial respectively.

The overall two per cent return for the first quarter was marginally down on last year's first quarter figure of 2.3 per cent. The company remains optimistic however, given total returns in the past 12 months of 12.5 per cent, a figure buoyed by a strong second half of 2003 performance, particularly in the retail sector.

Lisney predicts continued demand for retail property in the coming six months with evidence of strong rentals coming through to rent reviews. Prime retail yields are at a 20-year low at about 3.35 per cent on Dublin's Grafton Street and Henry Street. Good suburban locations in Dublin are reaching 5 per cent and 5.75 per cent, with provincial centres reaching 4.5 per cent as a typical figure.

Both office and industrial sectors are dependent on a revival in rental growth in order for returns to improve. It claims to have seen "signs" that some investors are experiencing a "renewed enthusiasm for office investments", so perhaps the tide has turned.

Vacancy levels currently stand at 18 per cent compared to 19 per cent in December 2003. "In our view prime office investments in Dublin are securing yields of between five per cent and 5.5 per cent. Industrial yields range from 6.75 per cent for very good and relatively small product and up to eight per cent for secondary stock," the Lisney report indicates.

It reports an increase in the supply of land zoned and serviced for residential development in the Dublin and county areas for the first six months of 2004. Yet this has not served to slow disquiet amongst developers, it warns.

"The requirement to provide social and affordable housing as part of private residential schemes continues to cause widespread concern for developers and builders," the report indicates.

The nine per cent stamp duty on land and commercial property "continues to have a dampening effect on the market", it says, adding that the substantial building levies introduced by local authorities must also be factored into any decisions by those seeking to purchase development land.

"For example, Dublin City Council has set development levies at €11,500 per residential unit with effect from January 1st, 2004," the report states.