MarketAnalysis:The Irish commercial property market may have enjoyed a record performance during 2006 but a new analysis shows a marketplace where sentiment is changing in certain sectors.

Uncertainties about the housing market are causing some developers to move away from residential development to other uses, according to the latest analysis of the market's first quarter performance.

It also shows a lower volume of investment here - caused by a lack of investment opportunities rather than market retrenchment.

The Irish commercial property market enjoyed a record performance in 2006 but there are already signs of a change, says Dr Clare Eriksson, head of research at Jones Lang LaSalle in Dublin.

"Some developers are reacting to the uncertainty regarding the future performance of the national housing market by applying for change of use in their development schemes from residential to other uses which have a more positive outlook for end-user demand," says Dr Eriksson. "This trend may continue in 2007 depending on the performance of the housing market going forward."

The investment market is suffering somewhat but not because of a lack of interest, she suggests. "The volume of Irish investment transactions has slowed in Q1 2007. The number of investors actively willing to invest in the market has not depleted but the level of good investment opportunities has. As a result, we may not see a repeat performance of the number of large investments experienced in 2006."

More than 70 per cent of investment turnover in 2006 was accounted for by just 15 deals which each achieved transaction prices of over €75 million, she says. Other trends emerging during the first quarter are the granting of planning permissions for higher buildings and also higher densities. "The recent grant of planning permission for greater heights and densities in the form of a 120-metre tower at the Point Village development will drive developer demand for prime city centre sites or sites with good waterfront or geographical vantage points," she argues in the analysis. Higher profitability is the key driver from the developer's perspective. "The implications of the grant of a tall building in the Point Village may be a key consideration for potential purchasers of the Burlington Hotel, a transaction that will test the current purchasing power of the market," she says.

The office leasing market in both the Dublin city centre and the suburbs remained strong, with demand being driven by the finance and insurance business sectors, she says. Notable lettings included Royal & SunAlliance for a new headquarters building in Dundrum and Avoca Capital in 75 St Stephen's Green. "This latter deal achieved a new record rent for prime city centre office space of €672 per sq m [€62.5 per sq ft]," she says. "Demand for new space in the quarter also came from the energy supply sectors with Eirgrid agreeing to take 5,502sq m [59,223sq ft] in the Oval ."

The industrial market got a fillip when the Dublin Port Tunnel came on stream, she says. "Anecdotal reports from industrial agents indicate that tenant interest in schemes in the north of the city has increased as a direct result of the opening of this new transport infrastructure."

A similar boost may also be seen from "the potentially positive impact that the future opening of the metro north line may have on the performance of commercial property in the north of the city", she says.

She delivered a note of caution on the economic background, in particular the poor inflation figures of recent months. "Ireland's rising inflation, which currently stands at 4.8 per cent, may have a detrimental impact on the future performance of the Irish retail market as consumer sentiment had a year-on-year drop of 17.5 per cent in February '07," she says.

"However, on the flip side, current consumer activity remains strong as the volume and value of the CSO retail sales index had annual increases of 7.3 per cent and 8.5 per cent in January 2007 respectively."

The early message for 2007 is one indicating caution, Dr Eriksson says. "Overall, the market needs to be watched carefully."