Turnover in the commercial property investment sector during the past six months was at least 15 per cent higher than for the corresponding period last year despite a decline in overall returns and continuing uncertainty about the market.

Hamilton Osborne King's latest report puts the turnover at £230 million (292.04m) while DTZ Sherry FitzGerald estimates that the final tally for the first half year will come in at £286 million (363.15m).

The number of transactions was well down on the same period in 2000, though the value of most of them was significantly higher. The largest single deal was the acquisition by British Land of a 40 per cent stake in the ILAC centre in part exchange for giving Irish Life 75 per cent of the equity in the St Stephen's Green Centre.

Irish Life was also active on nearby Grafton Street where it paid £17.2 million (21.84m) for the BT2 store in a deal that will give it an initial yield of 3 per cent.

The largest office transaction was the sale of the less-than-fashionable Canada House on St Stephen's Green to businessman Denis O'Brien for £18.5 million (23.49m).

Just as in 2000, institutional investors were the dominant players in value terms, accounting for 60 per cent of the purchases. Private investors were more active than last year, spending 38 per cent of the overall funds.

HOK said that retail accounted for 66 per cent of the investment value in the first six months, with offices next at 33 per cent and industrials dropping away to a mere 1 per cent, a fall that underlines the increasing tendency by occupiers to acquire their own premises. Interestingly, 17 per cent of the overall deals were valued at more than £10 million (12.70m).

DTZ Sherry FitzGerald said there were seven institutional transactions during the first six months. The majority of the funds had therefore been relatively inactive, opting to sit it out while the current uncertainty persists. A number of the institutions' property funds were still open, with inflows reported to be at a reasonably strong level. Although much of this money is being used to restore liquidity levels after last year's high rate of spending, this should result in greater institutional activity towards year end. Ironically however, given property's out-performance of other investment asset classes, a number of institutions were now overweight in property and may be forced to sell to rebalance their portfolios.

HOK said that with a relatively good income yield and solid prospects going forward, property remains an attractive investment compared with global equities which are still quite volatile (although Irish equities are performing well) and bonds, which are likely to produce lower returns over the year.

Not surprisingly, the agency predicted that the property performance this year will not be as strong as it has been in the last four to five years, although returns should be "robust" by international standards.

Overall returns this year are likely to be in the 10-15 per cent range, but over the coming years returns should return to more stable and sustainable rates of around 10 per cent per annum. In particular, as the sharp yield falls of recent years are unlikely to be repeated, returns will become more rental-value driven. Nevertheless, HOK says that property retains good investment prospects in the medium terms, particularly as economic growth continues.

DTZ said the level of interest rates is a key factor for the private market. If, as predicted, rates are cut a further 0.25 per cent, we are likely to see a significant flow of private money into property. At a base lending rate of 4.25 per cent, the average IPD (Investment Property Databank) equivalent yield of 6.05 per cent will again bring property investment close to a self-financing state. The direction of rates is, however, somewhat uncertain, with Europe experiencing both contracting growth and increasing inflation. This uncertainty has produced a flattening of the yield curve with little difference between short and longer term interest rates.

With total investment returns for the first quarter of 3.3 per cent and limited upward pressure on values in the second quarter, DTZ forecasts that total returns for 2001 are unlikely to be much in excess of 10/11 per cent. Although this would reflect a considerable slowdown on recent growth levels, it still compares well with other asset classes. The agency blamed the slowdown in property value growth on the economic uncertainties, particularly in the US. With many technology companies imposing a world-wide embargo on recruitment, demand for office and industrial space had slumped. With the technology and telecom sectors making up more than half the office take-up, the demand-led rental growth had slowed significantly.

On a more positive note, DTZ says that many of the multinationals based in Ireland service continental Europe and still remain profitable despite the general slowdown. In addition, although it now seems unlikely that the US will recover as quickly as predicted, only the most pessimistic do not expect a bounce back by mid-2002.

DTZ estimates that Irish investors spent around £900 million (1.142bn) in the UK in the 15 months to last March, giving them a significant 10 per cent proportion of the overall market.