Development LandLending institutions are attempting to bring some "reality" back into the property market through altered lending policies.

It could help to slow the rapid rise of site values which continue to reach astonishing levels.

All property commentators describe a very buoyant market for prime sites and infill locations, with high sales values providing the proof. The top values are in the €15 million to €16 million per acre range.

For example, Shanganagh Castle, the former juvenile prison in Shankill, offered 6.35 acres which went for €90 million. The Irish Glass Bottle site in Ringsend, Dublin 4 reached €412 million for its 25 acres. A two-acre site on Heather Road in Sandyford sold for €25 million.

Notable exceptions that topped even these figures included the former UCD vet faculty building in Ballsbridge. This saw 0.35 acres go for a startling €36 million, a record €95 million per acre. And the former Irish Times building on D'Olier Street, with 0.4 acres, reached €30 million - or €75 million per acre.

The question is how long can these prices continue? This will be answered by the market but, in part, also by the lenders.

There have been signs that rising interest rates, a trend expected to continue into 2007, is slowing auction sales of exceptional homes but also sites. This, in turn, has introduced more caution in the gearing lenders seek to apply to site purchases, says the managing director of Anglo Irish Bank, Tom Browne. "In the last 15 months we have been taking a much more conservative view of site acquisitions," he says.

He points to the fall back in residential prices in the past few months. "The real issue is the affordability factor," he believes. Prices in the starter home market have eased in line with interest rate rises over the past 12 months.

The market is a dynamic system, however, so changes anywhere in the system can be felt by all components of the system. Price stability for end product - built homes - influences the value of the lands they stand on.

"It is all about supply and demand but it depends on who controls land sales," says Browne. If house prices don't hold up this will depress land values and vendors will hold onto their land banks. "It depends what pressure the vendor is under. In recent times we haven't seen any pressure."

Anglo Irish Bank's response is to continue to service existing clients and to change the "level of gearing" - that is, the element of the land purchase that is self-financed by the buyer.

Typically, the Anglo Irish Bank lends 70 to 75 per cent of the purchase price. An expected reduction in this figure is "just an ease back, which is no harm", says Browne. "It is a good thing to bring a bit of reality into the market."

The director of development at CB Richard Ellis, Ronan Webster, also points to these subtle changes in the market. "Lending institutions have a significant influence over land values through lending policy but they will become even more vigilant in their loan assessments in the coming year," he says. "The higher cost of debt and the higher requirements for equity input into land purchases from banks will see a stabilisation of land values in some areas in the market," he adds. "This, ultimately, will prove an influence, as history shows that oversupply at this time in the cycle can be a key factor in leading to a downturn."

He believes that sellers will have to adopt a "realistic attitude" in order to conclude developments and transactions in 2007. And, although there "might be a hint" of oversupply on the periphery of urban areas, Webster argues that "the predictions for next year have never been better".

Slowed demand for residential land caused a number of sales to reach lower than expected values, says Garvan Walsh of Kelly Walsh. "There will have to be some adjustment in land values if deals are to be agreed and the method of sale being favoured will change from tender to private treaty. Land-owner expectations will have to be realistic if they want to sell in 2007," he believes.

Land values in the regions have been given a boost by the decision by major grocery chains to open more outlets. Incoming anchors, such as Tesco, Lidl and Super Valu, have also helped the development of retail parks on the back of these deals.

Lisney has handled a number of these transactions, including advising an international oil company on the acquisition of the Statoil portfolio, although this was later acquired by Topaz.

Town planning continues to be a problem, however. "Delays in processing planning applications continue to frustrate builders and developers," says Lisney. Even so, that company had a "record volume of transactions and turnover" for land sales.

Its view is that, while demand for development land remains particularly strong in south county Dublin, elsewhere developers are more cautious and will tend towards purchases where zoning has already occurred and known density of development set.

Walsh argues, however, that there was no discount being given for land which had planning compared to land which was zoned but had no planning.

"Some sales, such as the SDS site on the Naas Road, created new market levels and many developers decided to sell their own land as they could see little extra profit in building out the scheme," he stated.