Lenders are adopting a frugal stance amid fears of oversupply in the Dublin office market, according to property watchers. So while developers can take comfort from flat interest rates, the task of securing funds is becoming more difficult.

Typical interest fees are the equivalent of about 2 percentage points above base rates of about 5 per cent, said Mr Eric Hannigan, director of sales at Mortgage Insight, a division of the Sherry FitzGerald group. He added that some borrowers have secured deals charged at 1.5 percentage points above the base rate.

That equates with APRs of 6.5 to 7.5, although individual deals will depend on the nature of the project, its size, and a borrower's relationship with the lender. "Commercial rates were always deemed to be very expensive, but they're actually quite acceptable," said Mr Hannigan. He attributed a downward trend in the past five years to the advent of the euro and, before that, to the pegging of domestic rates with the deutschmark.

Similarly, the director of banking at Anglo Irish Bank, Mr Peter Butler, said rates were flat and were not expected to rise soon. "For the next year we don't, as an institution, see the rates rising. It's a benign climate in terms of borrowing from that end of things," said Mr Butler. However, he did not expect the cost of funds in the eurozone to decrease significantly.

Mr Butler warned that worries about a possible recession in the US were prompting lenders to be cautious about the office market in Dublin.

"The concern from the US arrived at Christmas. I don't think anyone factored in a possible recession even on December 1st. Obviously the technology crash in March did leave people asking questions but the potential wouldn't have sunk in then."

Lenders had concerns about a potentially serious oversupply after 2.5 million sq ft were taken up last year in the city. The fear was that a US downturn would arrest demand.

Citing oversupply, Mr Butler said: "It's almost a buyer's market at this moment in time ... Going forward, caution would be the watchword. There's even an element of sitting on hands." Mr Hannigan of Mortgage Insight agreed. "With the tech companies issuing profit warnings, there's concern about possible job losses. That's made people very wary. There's a very heavy reliance on the techs, certainly in the Dublin economy."

Of lenders, he added: "They'll always be exercising caution. It's just getting a little more frugal." Bank of Ireland's head of property in the corporate banking division, Mr Gerry Burke, said it was making a "clear distinction" between well-located property in the city centre and those outside it. "We would be selective in terms of what we'd look at on the outer parts of the city," he said.

"At the moment we see the market being quite positive for 2001. The tenant demand is there, but I'm not sure it would be there for the scale of development that has planning permission."

MR BURKE added: "I don't think banks are going to get into large-scale speculative office development ... overall, the market should continue to be demand-led due to economic fundamentals."

Anglo Irish would lend only to developers with pre-sales or pre-lets for projects outside the St Stephen's Green area in central Dublin, Mr Butler said. The retail property market was still buoyant and was expected to remain so, he added. Very high prices meant only established operators would have the resources needed to secure good properties in the pub business.

At Bank of Ireland, Mr Burke saw good growth potential for smaller-sized industrial units sized at 2,500 to 10,000 sq ft, and developments at the docklands district also offered potential. Also, tax relief was available for creche projects and demand was rising due to employment trends.

Asked about the potential of retirement home projects, Mr Burke said: "There is a market, but it's not as big as people think." Stating that backers of such projects should be selective, he added: "It's a massive industry in the UK, but I don't think there is the potential for developments at that scale because of the demographics."

Investors had also expressed interest in pharmacy outlets, because of the potential liberalisation of that sector, Mr Burke said.