The Government's bank guarantee has kept the wolf from the door for many property players, but the celebrations are likely to be muted for some time to come, writes Gretchen Friemann

WHEN THE Government announced its sweeping guarantee of the Irish banking system last week, a great sigh of relief seemed to emanate from all corners of the property sector. Armageddon had been averted.

But according to developer Harry Crosbie, it was a close call. On RTÉ radio last Thursday he claimed that without the State's intervention, work on his €850 million Point Village site might have stalled within weeks because his bankers were unable to maintain funding for the project in the face of such a catastrophic global liquidity crisis.

Ireland's entire commercial property market has been battered by the credit crunch. Not only has it endangered numerous development projects, it has paralysed the investment sector; exacerbated the slowdown in the retail and office markets; decimated the sales of pubs and hotels; and caused values on industrial land to plummet.

So will the Government's €400 billion rescue package for the banks also prove the right solution for the property market?

Few expect the lavish borrowing of the boom days to return any time soon but there is a renewed optimism in the industry that the State's dramatic liquidity injection will restore confidence and ease the standoff between buyers and sellers.

John Mulcahy, managing director of Jones Lang LaSalle, predicts that banks will resume "moderate" lending but he cautions "not at levels that justify today's values", indicating that sellers will have to stomach further price falls if deals are to be done.

His agency already has concrete proof that an aggressive adjustment of values can jolt interest in a property from cash-rich buyers. Last week Jones Lang LaSalle and joint agents, Jordan Auctioneers, put a 50 acre-plus site near Naas in Co Kildare up for sale for €20 million, when at the market peak such land might have fetched in excess of €50 million. That's a slide of 60 per cent.

Nigel Healy, industrial agency director at Jones Lang LaSalle, claims there have already been a number of enquiries about the property from investors who own "lowly-geared, income-producing assets". In other words, these potential buyers can stump up enough equity to satisfy the new loan-to-value rates of 70-75 per cent. And at €400,000 an acre, Mr Healy is confident his vendors will secure a deal "very close to the asking price".

But, as with all sectors in the market, industrial land values have tumbled far from their former peaks and Mr Healy recalls selling property over a year ago for €2 million an acre.

While these prices were largely confined to within the Dublin area, he acknowledges these values are likely to have slipped by at least 25 per cent.

The scale of the price falls in so many areas of the market means both institutional and private investors are nursing large losses.

According to John Moran, capital markets director at Jones Lang LaSalle, property funds' values have slumped by 25 per cent so far this year, on average, and he estimates there is "another 10 per cent to go". Speaking at the agency's launch of its online digital channel, which will promote clients' properties using digital video brochures, Mr Moran said it was impossible to call the market bottom, but pointed out that historically, commercial property yields have tended to remain within the 5.5 to 6.5 per cent range. He dismissed suggestions that Ireland could see yields widening to 8 per cent, as has happened in some areas of the UK, arguing such a move would be an "over-correction".

Yet with so few transactions in the market, asset valuation has largely become a guessing game. Irish Life's upcoming sale of its three-building office portfolio, which is to be put on the open market for around €90 million, will be closely watched by industry players, not only for the evidence it will provide on yield shifts but also because it will reveal the type of buyers vendors must now pitch to.

A number of agencies have recently claimed the high redemption rate will force institutions into offloading assets by the first quarter of next year at the latest. But a senior source within one of the largest property funds argues there "is little point in trying to sell assets into a market where there are no buyers" and he is doubtful the Government's guarantee scheme will boost the thinning ranks of investors.

"At this stage, I think we have to hope that sovereign wealth funds will be attracted by the higher yields on Irish property. There is already some evidence that they are looking." But he remains sceptical about whether there are now sufficient numbers of cash-rich domestic investors to sustain healthy market activity.

Last summer agent CBRE reported that there was a "weight of money building up for investment in property in Ireland, but not at current pricing. The sooner that values readjust, the sooner liquidity will return."

Yet it may be some time before investors return in the same numbers that were seen during the boom years. A source within Goodbody stockbrokers, which recently informed its clients that their €25 million mezzanine investment in a Sandyford development was "significantly impaired", concedes the brokerage houses are "unlikely to be looking at new investments" for at least 12 months.

And although he admits this will lead to a loss of revenue, he claims that Goodbody's focus for the foreseeable future will be on managing our "existing commitments".

Over the past five years, at least €500 million was invested by private clients of broking and accountancy firms in the purchase of land by developers. Industry observers are predicting heavy falls on the values of many of these purchases, leaving large numbers of investors out of pocket and unable to re-enter the market at more attractive levels.

As one source points out, the bank guarantee will "not bring back" the highly geared investors that once dominated the market.

And although developer Harry Crosbie claims the Government's intervention has rescued his project from lengthy delays, there are still question marks over a number of major schemes due to start construction within the next 12 months.

Retail developments are seen as particularly vulnerable with many in the industry conceding that some schemes, currently in planning, may never be built as banks withdraw funding and anchor tenants become harder to secure in the midst of a recession.

According to Savills HOK's chairman, Aidan O'Hogan, the timeframe for construction even on "strong schemes", which are well-located and have an anchor, is likely to be pushed out by two years as financing remains scarce. "Banks are now going to demand equity levels of 25 to 35 per cent and a high level of pre-letting will be required."

But other industry experts point out that many large-scale projects, such as the Carlton cinema site, the Bray Town Centre development and Blanchardstown's Yellow Mall, are "conveniently held-up in planning". The consensus is that those schemes now under construction, such as Harry Crosbie's Point Village and Liam Carroll's Parkway shopping centre in Limerick city, are under the greatest pressure.

There were fears that Carroll's development would have to be abandoned because of the deepening consumer downturn. Over the past month only a small amount of sub-contracted workers have been on site but SIPTU recently claimed the developers had confirmed the project was going ahead and were awaiting the "release of resources" from anchor tenants, Tesco Ireland and Penneys.

Clearly for many property players, the Government's bank guarantee has kept the wolf from the door, but the celebrations are likely to be muted for some time to come.