Turnover this year is edging up to €2 billion - compared to €3.6 billion in 2006 - but the credit crunch and a slowing economy mean 2008 will be one of the toughest years for a decade or more, writes Jack Fagan

The property sector is holding its breath as it comes to terms with the worsening credit squeeze, the large number of development sites overhanging the market and the threatened slowdown in economic activity.

Lower returns are about to be reported for 2007 but with so much apprehension around it is easy to forget that commercial property has produced phenomenal results over the past decade. Even in 2006 overall returns again exceeded 30 per cent and, with the office and retail markets performing particularly strongly, there was little on the horizon this time last year to suggest that anything was amiss.

The first six months of 2007 were equally buoyant but once the credit crunch hit in August, sentiment changed almost overnight and vendors started to hold back properties they planned to sell. Those who proceeded to market development land were generally disappointed as the banks restricted lending to their best customers.

The vast majority of the sites are still on the estate agents books. The end result is an erosion in business confidence which directly affects commercial rents and values.

Even with the change of fortune in a wicked August, commercial property in Ireland will still manage to show year end returns of around 15 per cent, roughly double the figure expected in the UK.

But the prospects for next year are not as encouraging.

Commercial property lending in Ireland is well and truly at record levels but, with capital values up by between 6 and 8 per cent last year and rents still rising, the chances of a property crash must seem remote.

However, like the US subprime mortgage market, commercial property is typically highly leveraged, sometimes by up to 90 per cent of the value of the property.

Banks that are still in the lending business have tightened criteria, reflecting their own difficulties in borrowing money, which is making deals more expensive.

A senior figure in the commercial property sector said that, because the debt market was no longer functioning as usual, the number or deals had already fallen off fairly significantly. (Turnover this year is slowly edging up to €2 billion compared to €3.6 billion in 2006).

He predicted that there would be no pick-up until the lending market returns to normal.

The other serious implication for the commercial market is that, if finance for development becomes tighter, then there could be a slowdown in new office developments despite the sizeable number of firms still looking for headquarter buildings.

This might well encourage companies in search of extra space to move quickly and rent some of the newly completed blocks still available.

This will not be an option for Bank of Ireland which is looking for up to 74,322sq m (800,000sq ft) - easily the largest ever requirement for office space in this country.

However, there were unconfirmed reports this week that the bank might well delay its search for new premises because of the 50 per cent fall in its share price from its peak early in the year.

If the shortage of funding impinges on new office developments, then the odds are that it will first affect the retail market which looks as if it had run out of control with the support of the banks.

More than 464,515sq m (5 million sq ft) of additional shopping centre space is planned for the Dublin area in the next few years and the list of new shopping centres planned for provincial cities and towns is even more ambitious.

The reality is that many of the provincial centres - not to mention some parts of the Dublin area - are already over supplied with both shopping centres and retail parks. It may well take the threatened fall-off in retail sales to illustrate the extent of the over development.

The trials and tribulations of developing a provincial shopping centre were underlined in the High Court last week when Maryborough Construction Company was put into examinership because of difficulties in developing The Maltings, a 44,000sq m (473,612sq ft) shopping centre and residential scheme in Portlaoise town centre. The company ran into difficulties because of an over reliance on Anglo Irish Bank which has blocked further funding.

The developers had already drawn down €23.2 million of the €84.5 million approved by the bank. The failure to sign up an anchor tenant in the shopping centre was advanced as one of the stumbling blocks.

Happily another investor may rescue the development.

In Athlone, attempts to interest investors in the newly opened Town Centre have received a lukewarm reception and, despite the availability of generous tax breaks, the promoters have missed their initial deadline.

The Maltings is not the only shopping centre that has failed to land an anchor capable of pulling in the shoppers.

Several more are in the same position, hoping that the rapid expansion of Dunnes Stores, Tesco, and other multiples will continue unabated. Only time will tell.