MarketAnalysis:The commercial property market has lost some of its "steam" according to Savills HOK.

The agent's latest Property Outlook says that, with the economic indicators still positive in the medium term, it expects "more realistic, modest growth".

The report admits that it has been difficult to pick out a trend and therefore predict with some degree of accuracy what to expect for the remainder of the year. The latest increases in interest rates and the feeling that more are on the way had fed into investor thinking.

Demand was still strong domestically but, increasingly, investors were looking abroad for better returns and also because there was a readily available supply.

Pension funds and other institutions along with private investors were more active in their search for trophy assets at home. The private banks and syndicated investors were looking for a product that provided more short term opportunity to improve returns.

"This has been the single most defining aspect of the current phase of the market," says the report. "Investors are always looking for angles to improve returns, but had also bought in anticipation of further yield contraction. We are at the top end of this yield cycle thus rental growth prospects, refurbishment and redevelopment and active asset management have become key considerations."

Savills HOK also noted the increasing investor interest in pre-funding opportunities, especially in the office market where further rental growth was expected. This provided investors with extra risk but potential for improved returns. The office market was expected to provide better returns than either retail or industrial.

Savills HOK estimated that turnover was likely to be well down on the €1.25 billion transacted in the corresponding period in 2006. Uncertainty caused by the decline in the new homes market had fed into developers' thinking and most were holding off selling completed investments.

The other issue for them was where to reinvest the proceeds of a sale. "Due to a combination of these factors we still see strong prices being achieved for quality product in the short term and little movement in prime yields. Occupational demand is still high from both the retail and office markets which is critical to the supply of new investment product."

The report envisages an increased supply of investments in the second half of the year but acknowledges that turnover is unlikely to reach the €2.25 billion achieved in 2006.

Savills HOK office specialist Roland O'Connell says in the same report that office lettings so far this year have exceeded 100,000sq m (1.076 million sq ft).

However, a significant number of these deals had yet to be signed and a number were also subject to obtaining planning permission, but there was a high degree of confidence that all these would be completed in due course. O'Connell says that rents were still rising and in some cases had reached €670 per sq m (€62.25 per sq ft) even for large lettings. These levels were only achieved on the back of very generous incentive packages for large lettings.