MarketAnalysis:Total turnover in the first six months of 2007 was around €800m, indicating that the full year figures will be down on the €3 billion recorded in 2006, writes Lena Clarke.

This year started somewhat sluggishly as investors began the year with a wait-and-see approach. However, investor activity picked up over the spring and, now that the election is over, there are definite signs that confidence and momentum are building as we reach the end of Q2.

Total turnover, including properties under offer, in the first six months of the year was approximately €800 million, indicating that the full year figures will be down on the all-time-high of €3 billion recorded in 2006.

Lisney estimates that turnover for this year will be on a par with the healthy level recorded in 2005, which was about €2 billion.

Significant transactions to monitor (that will boost turnover) include The Square shopping centre in Tallaght where the expected price is €350 million and Eircom's sale and leaseback in Citywest which is expected to secure in the region of €40 million.

Investment in overseas property is still strong with Irish investors' spend estimated at over €4.2 billion so far this year - this is a similar level to the same period last year. Investment in the UK accounted for approximately 65 per cent of this compared to about 75 per cent last year.

In Ireland, the majority of investors continue to focus on the office sector where expectations for continued rental growth are driving demand. Offices accounted for over 55 per cent of turnover during the first six months while the retail sector accounted for approximately 40 per cent.

The main activity in this sector surrounded the two sale and leaseback portfolios by AIB and Bank of Ireland.

Industrial property accounted for just 5 per cent of turnover over the first six months of 2007. The demand for industrial premises is strong, but turnover in this sector is held back by a limited supply of good product, hence yields continue to improve in this category.

Yields are holding firm, particularly for larger lot sizes. Recent transactions include the €50 million-plus sale of the Royal Liver office portfolio which included properties on Lower Mount Street, Pembroke Row and Earlsfort Terrace.

This deal highlights the fact that yields for city centre offices remain below 4 per cent where there is a development play.

Where such development potential does not exist, city centre offices are yielding between 4 per cent and 4.5 per cent, depending on covenant and location.

Retail yields have levelled with yields for smaller lot sizes softening marginally as a result of higher financing costs and increased supply. Recent interest rate increases have affected the smaller investors who are more cost-sensitive.

That said, prime city centre retail yields continue to hold firm. This was evidenced by the recent sale of a portfolio of units in Castlemarket, beside Grafton Street in Dublin, which sold for approximately €33 million, reflecting exceptionally low yields of 2.75 per cent.

Recent sales indicate that yields on industrial property continue to harden.

Prime industrial yields are now sub 5 per cent, however they vary considerably depending on location, lease length and covenant strength.

Three prime industrial warehouse units in Fonthill Industrial Estate sold at the beginning of the year for €17 million, reflecting an overall yield of 4.9 per cent.

While there is no official data yet for capital and income growth over the first six months, preliminary estimates by Lisney indicate that the best performing area is likely to be the office sector where total returns for the six months to the end of June 2007 will be 7 per cent.

Retail returns should be closer to 5 per cent for the first half of the year, while industrial returns are likely to reach 6 per cent.

The industrial market is a particularly attractive alternative to many investors. Despite some compression over the last 12 months, industrial yields continue to look appealing compared to other asset classes and these higher yields underpin performance during periods of moderate growth. Occupier demand is good and vacant possession underpins values in this sector. Industrial property also offers good diversification to a portfolio and in our view industrial rents will improve at a steady pace in the year ahead.

Investment activity traditionally picks up in the last two quarters of the year when deals that have been bubbling or are in the pipeline eventually come to fruition. This year has been slow to get going, but there has been a healthy level of activity over the last six weeks. Lisney anticipates that demand will gain momentum through the year.

There was an element of stock-taking over the first quarter, which has been good for the market, and prices stabilised. Investors are now reassessing values and seeking out opportunities. Underlying fundamentals remain favourable and forecasts of 5.4 per cent GDP growth and 78,000 new jobs suggest that the economy is performing well which will benefit the investment market.

•Lena Clarke is divisional director (investment) with Lisney