Throughout the year, fleet footed private investors have once again been thedominant force in the investment market, writes Jack Fagan, Property Editor.

The demand for property investments has never been stronger even though the vacancy rates in the office and industrial sectors remain at their highest levels for over a decade. The end result is a two-tier market that flourishes for some and poses problems for others.

The uncertainties in the bond market and the long running volatility on the stock exchanges - though that has changed in recent months - has persuaded a great many private investors to switch into commercial property.

In a relatively small Irish market where investments are always scarce, most yield-hungry players were forced to look abroad for investment opportunities.

The search in the UK - and to a much lesser extent on the Continent - yielded a staggering €2 billion worth of investments from the start of the year.

The Irish market, by comparison, accounted for only €800 million, a higher-than-expected figure that is unlikely to be equalled next year.

For that reason, as well as the higher transaction charges here, some of the companies sourcing the foreign investments are now predicting that the differential between the spend in both markets will be accentuated in the coming year as revenue producing investment opportunities in this country become even more scarce.

While commercial properties in the UK have generally been showing better yields, there have also been instances of properties being over rented to achieve higher selling prices. Estate agents who developed this business over the years now have to compete with accountants, bankers and a range of "experts" putting consortia together to buy larger lots sizes.

Commercial property investments generally live up to expectations because the terms are usually set before they are offered for sale. It is a different matter entirely in the residential sector, particularly in London where rents have been falling in recent months just as interest rates have been rising.

With a huge weight of money chasing Irish investments from the start of the year and yields being continuously pushed down, it was always on the cards that the institutions would capitalise on the strong market by selling off some of their older investments.

This they duly did with Royal Liver leading the way with the sale of two portfolios for around €95 million.

One block of property, which included a range of office and retail buildings on Chatham Street, off Grafton Street, was sold privately despite an earlier plan to offer it on the open market.

However, it was Green Properties that set the tone for the city centre retail sales when it secured €12.3 million - a full 50 per cent above the guide price - for 10 retail investments at Castle Market, an attractive pedestrianised street running from South William Street to Drury Street.With the rents of virtually all the buildings about to be reviewed, nobody doubts that this is likely to prove one of the best long term purchases in the city for some time.

The most significant retail investment sale was not, as usual, on Grafton Street but across the river in Henry Street, where Royal and Sun Alliance secured around €48 million for four adjoining shops.

Both the yield (initially 2.5 per cent but possibly showing an equivalent yield of 3 to 3.25 per cent) and the identity of the purchaser (Arnotts) took the market by surprise.

The acquisition lifted the cloak on Arnotts long term strategy to greatly enlarge Dublin's most successful department store.

Simultaneously the company bought in the adjoining premises owned by Independent Newspapers to enable it to embark on an amazing two-acre, €130 million extension.

The yield set by the Henry Street sales will not have gone unnoticed in the various institutions holding high street investments. These portfolios have by now been rapidly revalued to enable the funds to put a more respectable gloss on their annual returns.

Even before the Henry Street sales, the retail market was easily the best performing sector this year, showing returns of just over 22 per cent in the 12 months up to end of September.

Overall returns from the property are expected to reach at least 10 per cent compared to a disappointing performance in 2002 when the growth was only 2.2 per cent.

The high level of sales by the institutions during the year was triggered by the need to rebalance their portfolios.

After the huge fall in equity values, property had become over weight. Because institutions invariably display the herd instinct - moving together like Browns cows - they all believe that equities now offer the best prospects for growth in the immediate future.

However well-founded those expectations are, the investment climate could also change quite rapidly. Lena Clarke, divisional director in Lisney's investment division, says there are already signs that the institutions' appetite for Irish property is returning, particularly for prime retail investments and, to some extent, for well-located modern office stock.With longer term interest rates on the rise, she argues that this may shift the balance of demand back to the pension funds in 2004 as financing becomes less attractive for the private sector.

In addition, she says that the rally on the equity markets (up 27.5 per cent in the 12 months to September) will serve to rebalance portfolios, reducing property's over weighted status and returning it to "active requirement" status for the first time in two years for many funds.

In the meantime, the fleet footed private investors have once again been the dominant force in the investment market, adding to the immense wealth that they accumulated during the longest ever running property boom in Ireland that ended in 2001.

They were lucky enough to be able to capitalise on annual returns of 24 to 39 per cent in that amazing eight-year period. After that experience it seems a safe bet that they will not be following the example of the institutions and risking it all on the equity markets.