A report on commercial property in Belfast has warned that the city is likely to run into a severe shortage of office space inside the next four years.

The report, by commercial property agents Insignia Richard Ellis Gunne, says office space is in short supply at a time when it is estimated that up to 14,000 jobs could be created by inward and foreign investors by the end of 2003, requiring at least 2 million sq ft of office space.

Demand is such that Belfast is one of the most buoyant office markets in the UK, and last year was second only to central London. Research shows that hardening yields and strong rental growth resulted in total returns of 19.6 per cent four percentage points above their long-run average of 15.6 per cent a year. This compares favourably with 15.9 per cent in London's West End, and with the UK average of just more than 14 per cent.

In a survey of 38 European centres, conducted earlier this year by London property consultants CB Hillier Parker, Belfast registered the second highest rental increase (16.7 per cent), behind Madrid (19.5 per cent). The report, which compared prime office rents in each area converted into euros per square metre per annum, showed that Belfast rents were the equivalent of €242 per square metre, putting it on a par with cities such as Barcelona (€253 per square metre), Lisbon (€257), Budapest (€233), Copenhagen (€241) and Vienna (€249). Other factors cited by the CB Hillier Parker report as having a strong influence on Belfast's rising rents include an unprecedented level of speculative development, the overflow from Dublin, and Belfast's comparatively low occupation costs.

The managing director of Insignia Richard Ellis Gunne, Mr Alan Gowdy, said a skilled labour pool and low costs were making Belfast an attractive investment location, and that investor confidence would continue as long as there was a measure of political stability.

"We predict in particular an increase in companies from the Republic. A growing number of them are taking advantage of the lower property and occupational costs, and the available skills base, which is in contrast to the extremely tight labour market in Dublin," Mr Gowdy said.

The survey reflects the view expressed recently by Mr Colin Matthewson, director of property consultants Hamilton Osborne King, that an increase in dot.com start-ups will lead to an increase in demand for office space and warehousing. Mr Matthewson said the demand for flexible, high-specification buildings with increasingly sophisticated and state-of-the-art telecom systems was also likely to affect the market significantly.

"The construction of these new, purpose-built buildings could well lead to the obsolescence of older buildings with more conventional layouts," he said.

An example of the client coming to Belfast is the Japanese telecoms giant Fujitsu, which confirmed recently that it had chosen a £30 million office development at Lanyon Place as the location for its Northern Ireland telecoms software engineering centre and headquarters. It will be the first major tenant in the 150,000 sq ft high-specification office block at the prestigious waterside address, taking 79,000 sq ft of the building on a 20-year lease at a rental level of £13.50 sterling per square foot.

Mr Matthewson said the growth in Belfast prime office rents was "extremely encouraging".

"While it's difficult to explain precisely, we can assume that demand for high-specification accommodation, particularly from within the burgeoning technology-based and IT sector, is one of the main factors stimulating rental growth on this scale."

Over the past two years, the demand for prime Belfast city centre properties has been unprecedented. Andy Tough of Lisney has said rich yields for retail and office investments are comparable with many other UK centres, although rental levels, particularly in the office sector, have not achieved the same level of growth. "There is clear evidence that further rental growth will be forthcoming in the office sector and recent deals have shown rentals of around £12 to £14 per square foot," said Mr Tough.

Over the past year or so, many investors and developers have bought 1970s buildings with a view to medium-term redevelopment. Examples include Londonderry House in Chichester Street, Belfast, which was recently sold for £4 million, and River House in High Street, Belfast, which went for around £7 million. This buoyancy is not confined to the office market. The multimillion pound Victoria Square Project is an example of the potential that exists in the city's retail sector.

Work is also well advanced at the 260,000 sq ft Citylink Business Park, which is on a 3.5 acre site overlooking the Westlink, just a few minutes walk from Belfast city centre. Belfast's newest business park, Citylink is being built on a site formerly occupied by Boxmore International.