A second report on the commercial property market has confirmed that the pace of growth slowed down in the first three months of this year. The Irish Property Index, compiled by Jones Lang LaSalle, has calculated returns in the first quarter at 3 per cent - even lower than the 3.3 per cent reported a week earlier by the London-based Investment Property Databank.

It is a measure of the slowing of the market that the first quarter returns from Jones Lang were 2.7 per cent lower than for the same period in 2000.

Some slowdown in the pace of returns was always to be expected after such unprecedented growth, but in this case it has been helped on its way by the shudders from the US technology market. There is now nervousness of TMT (telecoms, media and technology) covenants across the board - in some cases regardless of the individual company's strength. Job creation forecasts for 2001 remain relatively strong, at 1994 to 1998 levels - rather than the very peaky years of 1992/2000.

There is still demand for offices in the market-place, according to Margaret Fleming of Jones Lang, although there is a greater balance of strength between landlord and tenant than there has been in the last few years. Demand for retail space is also strong, with a relatively restricted supply pipeline.

The report suggests that the market this year is likely to be characterised by relatively flat yields, and some outward movement of yields for less prime property. The upward movement of rental values should compensate for this as long as the yield adjustments are small.

Jones Lang says it will be later in the year before the long-term outcome of this balancing act becomes clear, but overall returns will hopefully make it into double figures. Low interest rates still prevail, and should have a limiting effect on the extent to which yields can drift out.

Capital values rose by 20 per cent in the year to March 2001, with the quarter showing an overall capital value increase of 2 per cent. Growth in 2001 is expected to be driven by rental values, rather than yield adjustment. The strongest sector in the quarter was offices, where values rose by 2.9 per cent, giving a 21.3 per cent increase in the year to date.

Industrial capital values also recorded a strong performance with a 2 per cent increase in the quarter, resulting in a 13.2 per cent rise in the year to March 2001. The retail sector grew by 0.3 per cent in capital value in the quarter, and by 19.8 per cent in the year to date.

Based on a mixed portfolio of investment properties, the income growth for the year to the end of March was 6.7 per cent. There was no income growth in the latest quarter, as no reviews took place in the portfolio. Offices continue to be the strongest performer, with rental value returns of 3.7 per cent in the quarter and a 24.5 per cent rise in the year to date. Second generation offices are still experiencing rental growth as lower rents play catch-up with the prime third generation market.

Industrial rents performed well in the quarter rising by 2.8 per cent - and by 16.5 per cent in the year to March 2001.

The retail sector showed the most modest growth, with a minor increase of 0.3 per cent recorded in the quarter, giving a 18.3 per cent rise in the year to March 2001. Jones Lang says this may surprise some investors who have targeted retail as a preferred sector for 2001, but the slow growth is probably due to a shortage of rental evidence on the prime streets rather than to any more sinister reason.