Investments ReviewConfidence in the office market, prompted in part by the long list of prestigious companies looking for new HQs, has helped the sector to outperform the retail market for the first time since 2001, writes Jack Fagan

When things start to look too good for commercial property, alarm bells ring with the banks.

After funding more development sites this year than at any time in the past, the lending institutions have suddenly adopted a more cautious approach. The result is that many of the sites offered for sale in recent weeks remain unsold. A good deal of them are either overvalued, poorly located, or have a long way to go before they can get planning permission.

This may seem an over reaction by the banks. After all, the commercial market is about to report overall returns of about 30 per cent for 2006 - the best result since the height of the property boom in 1999.

Equally impressive is the fact that capital values have also grown by possibly 25 per cent.

The recent slowdown in land sales corrects an over-bullish outlook, allowing the commercial sector to ease into a soft landing, much the same as is happening in the housing market. For all their differences, the residential and commercial sectors are inextricably linked.

Yet 2006 will be remembered as the year of many notable land sales. The winners, as always, were many land owners who had been sitting on sites for years, watching values rise in line with housing inflation.

The pent-up demand for commercial buildings and town centre facilities also produced a series of inflated prices, frequently paid by investment syndicates rather than by traditional builders.

Last spring, many of the landowners decided that it was a good time to offload their sites, given the ever-increasing warnings by economists, banks and the media that the runaway housing market was heading for trouble. And sure enough, the second-hand housing sector took a hit in the autumn.

Shortly afterwards, sales of new houses and apartments in some Dublin suburbs - as well as in many parts of the provinces - also began to dry up largely because of five interest rate increases. Some land owners in secondary locations who hesitated about coming to the market have probably missed out on the high prices as their sites remain unsold. Price expectations will have to be trimmed back to achieve a sale.

As always, there are still strong prices available for well located sites, particularly in the south Dublin suburbs where even small infill plots are difficult to come by.

Whatever difficulties lie ahead, several land sales this year set new benchmarks. First there was the sale of the 200-acre Millennium Park in Naas for €325 million; then Sean Dunne paid €177 million for the lands adjoining AIB Bank Centre in Ballsbridge, and in July two investors acquired a 14-acre mixed-use site beside the Red Cow roundabout in west Dublin for €107 million.

The highlight of the winter sales was the purchase of the 25-acre Irish Glass Bottle site at Ringsend in Dublin for €400 million. Developer Bernard McNamara headed the syndicate which will fund one of the most significant developments in south Dublin in the next few years.

Before the ink was dry on the transaction, McNamara did what many others buying expensive sites have been doing for the past two years. Instead of going to the banks, he engaged an investment agency to raise a substantial proportion of the purchase price from private investors. The offering was over-subscribed within a few days by wealthy businessmen anxious for yet another stake in the fashionable real estate development market.

Other investors have been equally successful in buying "dry" investments which were more readily available than for many years. In fact, sale and leaseback deals accounted for over €1 billion of the €3 billion-plus that will have been invested in the commercial property market by the end of 2006.

Not only did AIB and Bank of Ireland embark on sale and leaseback deals for their head offices in Dublin, the two banks did the same with many of their retail branches. And there will be even more opportunities to buy your local bank in the new year.

The 12-strong AIB retail portfolio will show a net initial yield of around 2.78 per cent for purchaser Gerry Gannon while the 36 branches sold by Bank of Ireland will give a variety of investors a return of between 2.6 and 3.7 per cent.

AIB is in the process of selling another 25 branches which are expected to net over €100 million. AIB also secured €200 million for its original bank centre from Hibernian Investment Managers while Sean Dunne got the development site fronting on to Merrion Road.

Bank of Ireland's all-too-small headquarters on Baggot Street was sold to Quinlan Private Capital for €212 million. The yield here was 2.7 per cent, rising to almost 3.5 per cent on the first rent review in five years.

The sale and leaseback formula is also being pursued by other companies, including Eircom, which is seeking €180 million for its nine-storey headquarters under construction opposite Heuston Station in Dublin 8.

ICON plc is looking for €80 million for its headquarters and proposed extensions at South County Business Park in Leopardstown, Dublin 18, and in the city centre Garret Kelleher's Shelbourne Developments has been asking for no less than €180 million for a recently redeveloped Department of Justice offices at 75 St Stephen's Green.

Several smaller investment properties are for sale on the same basis, raising expectations that more firms will embark on the sale and leaseback of their premises next year, not only to free-up capital, but also because it is cheaper to rent than borrow.

For all the investment activity in the Dublin office market, retail investments still managed to account for 46 per cent of the overall turnover.

This was primarily due to the sale of the Pavilions shopping centre and an adjoining development site in Swords to Joe O'Reilly for €575 million. O'Reilly, who led the development team that built Dundrum Town Centre, subsequently sold on a major stake in the Pavilions to Irish Property Unit Trust and Irish Life for €240 million.

Although there is a general expectation that overall returns from the commercial market will ease back in 2007, the weight of money chasing property may be even greater than this year as institutions move swiftly to find a home for cash reserves built up in recent months.

Office investment in Dublin city centre and in the Docklands will be on most people's shopping list because of the prospect for rent increases. The huge success of the various office developments on the south docks and the prospects for an even more ambitious roll-out on the north docks, where PricewaterhouseCoopers and Anglo Irish Bank will be the anchors, has attracted the attention of the institutions and the investment syndicates.

The new level of confidence in the office market, prompted in part by the long list of prestigious companies still looking for new headquarters buildings, has helped the office sector to outperform the retail market for the first time since 2001.

This trend looks set to continue because of concern that many areas are over-shopped - not least in many provincial towns - with overall retail space having trebled in the last five-year period to over 1.5 million sq m (more than 16.1 million sq ft).

And if you think that could end in tears, then watch out for even bigger problems in the retail warehousing market where trading space has quadrupled since 2001, according to CB Richard Ellis.

There are now 678 retail parks in Ireland providing over 800,000sq m (over 8.6 million sq ft) of space.

A further 105,000sq m (over 1.13 million sq ft) is currently under construction around the country while planning permission has been granted for another 110,000sq m (over 1.18 million sq ft), including the planned Ikea furniture outlet in Ballymun.

Ikea will undoubtedly affect many of its over-priced competitors but with two, three and more parks planned for many large towns, the casualties will come in due course.