Croesus/An Investor's View:It has been another torrid week in the markets with daily share-price volatility remaining well above normal. While it hasn't been all doom and gloom, most of the fresh news hitting the market has continued to be negative.

During the week, the Irish market was buffeted as a result of a report from Europe's largest bank, UBS, which downgraded the Irish banks. UBS advised its clients to sell AIB and Anglo Irish Bank. It lowered its rating on Bank of Ireland to neutral and maintained its neutral stance on Irish Life & Permanent.

A negative view on the outlook for commercial property values in Ireland and Britain is at the core of UBS's negative assessment. Its analysts said commercial property values in Ireland could slide by as much as 30 per cent. In such a scenario, bad-debt provisions at Irish banks would rise sharply, which would result in a big dent on profits in 2008 and 2009.

The Irish banks are heavily exposed to property in both Britain and Ireland. British commercial property values began to fall during the second half of last year. What surprised most observers was the speed at which values adjusted downwards in the final months of last year. From the peak it is estimated that British commercial property values have fallen by 12 per cent.

Current news emanating from the British property sector indicates that further price falls lie ahead. A recent survey from the Royal Institution of Chartered Surveyors highlighted the decline in tenant demand and surveyor confidence in the British commercial property market in the last quarter of 2007.

The report found that tenant demand in the fourth quarter of last year had reached its lowest level since 2003.

Confidence among surveyors in the retail market has fallen to a six-year low, reflecting the tough retail trading environment. The office market has held up better but is beginning to show signs of weakness due to weaker employment growth in financial and business services.

According to property agent Atisreal, the take-up of City office space is down 7.5 per cent as expansion plans by financial service firms are put on hold.

The Dublin commercial property market has, as yet, shown little sign of weakness. A report from Savills HOK put the take-up of modern office space in Dublin last year at 297,000sq m (3.2 million sq ft), a 37 per cent increase on 2006. The report predicts that the take-up of space in 2008 will be lower, at 200,000sq m (2.2 million sq ft). However, supply and demand is expected to be well balanced with just 185,000sq m (1.9 million sq ft) of new space expected to be built.

Despite these apparently good fundamentals in the Irish commercial property market, it is difficult to see how it can remain immune from growing negative international sentiment. Sharply slowing Irish economic growth sets the scene for an inevitable drop in values. The question is how severe the drop will be, and the UBS analysts have taken a view that is far more negative than the Irish brokers and property agents.

Of course there is some irony that, in the same week that UBS analysts warned on the prospects for the Irish banks, UBS itself reported a record loss after writedowns of about $14 billion (€7.7 billion) related to subprime mortgages in the US and related structured vehicles. The bank's fourth-quarter 2007 results are not due to be published until February 14th, but it pre-announced the headline numbers given the scale of the write-offs.

The fourth-quarter net loss of $11.4 billion was almost double the amount expected by analysts. Just like several of the large US investment banks, UBS is turning to sovereign wealth funds and Middle Eastern investors to shore up its depleted capital base. It aims to sell 13 billion Swiss francs (€8 billion) in convertible bonds to the Government of Singapore Investment Corporation and an unidentified Middle Eastern investor. It is also proposing to pay its dividend in new shares instead of cash and to resell 36.4 million shares held in treasury to raise another SFr6.4 billion.

For investors in Irish banks, the only silver lining is that they have virtually no exposure to subprime-related investment vehicles.

Nevertheless, with international investor sentiment so fragile, particularly regarding financial stocks, the focus of international and domestic investors will remain on how well Irish property holds up in the face of negative headwinds in 2008.