Despite the fallout from the announcements that the encashment values of a number of property bonds have been sharply reduced, the operators of the funds are reasonably optimistic about their medium to long-term future. However, there is a fair amount of apprehensive over the short-term prospects.

There is a general acceptance that when growth resumes, it will be at a more pedestrian rate, in contrast with the spectacular gains notched up over the past eight years. Investors should note that with in/out costs (stamp duty and transaction costs) of 11 per cent, gains of more than that would have to be achieved before there would be any real gain.

Pressure was put on four property funds - Irish Life, Hibernian, Friends First and Canada Life - when a number of stockbrokers advised their clients to sell and realise some of their accumulated profits.

Mr David Cullen, chairman of BCP Stockbrokers, said his firm has been a net seller since last November. They have been putting clients into property funds since 1993/4 and it has "worked out well there have been six to seven good years". He said an investor putting in £100,000 (€126,973) in 1993 would have a portfolio worth £300,000 (€380,921) now.

Those days will not be repeated. Mr Cullen said he was "not hugely optimistic about the outlook". He said "we could be in for a period of negative growth for property values ... we will see a slowdown, but there will be nothing dramatic." On a more positive note, he pointed to the accumulating rent in the funds, "so there will be no fall in the real asset value in the units".

He said it was a "temporary situation and at some stage it will track up but could take 12 to 24 months".

On the oversupply of office space in the Dublin market, he said there is still a shortage in the Dublin 2 and 4 areas.

He said while the market "may drift off", property is "still a very solid long term investment".

Mr Cullen posed the question that is on everyone's lips with the slumping stock markets, the fall in domestic growth, and the fear that the US economy may be pushed into recession as a result of last week's terrorist assault on the centre of New York's financial sector and on the Pentagon; if you sell the property units where do you put the proceeds?

He likes what he sees in the UK and is investigating that market. He is planning to set up a £100 million (€127m) property syndicate with properties in London City, London West End and London Mid-Town.

Friends First was first in the firing line following brokers' recommendations to sell part or all of their property units and has the largest cut (12 per cent) in the encashment value of its property funds in an effort to stem the outflows.

Looking at the breakdown of its portfolio it is easy to see why. It was totally illiquid with cash of minus 3 per cent. Roger Mansfield, the property manager, said that had the fund kept a lot of cash it would have been criticised for not taking full advantage of a the property market. "There was an element of panic" though he thought panic might be too strong a word. The advice to switch out of property "put pressure on the fund."

While Friends First is not selling any property at the moment, he conceded that that could happen, or alternatively, a property could be transferred into another fund. And he conceded that some customers felt aggrieved as they had invested quite late in the cycle. "Property is supposed to be a long-term investment," he said. While he is still optimistic, "this is very much tied into the underlying economy and the overall economy is still positive".

Irish Life, which reduced the encashment value of its units by 7 per cent, also has had a policy of having little cash in its portfolio and following the outflows is now in a negative cash position. Mr Paul King, head of property fund management in Irish Life Investment Managers, said it was best to have "as full an exposure to property as possible" as cash dilutes the performance. Irish Life has by far the largest property fund with a value of £433 million (€550m) and apart from the reduction in the encashment value it also placed a six month withdrawal embargo on any investor into the fund after September, 1998. Around 54 per cent of the fund is in offices, 29 per cent in retail and 17 per cent in industrial. "There are no rental arrears to talk of," Mr King said.

Rental income in the industry rose by some 4 per cent in the first six months of this year and the growth in the Irish Life properties was around the same.

He denied any suggestion that his fund paid too much for Skehan House earlier this year, noting that it was sold by tender and there were several other bids close to that of Irish Life and its 25 per cent partner Lally Duffy.

A planning application to extend the block by another 15,000 sq ft has been turned down and a new application has been lodged for an extension of 5,000 sq ft. Mr King said his view of the market has not changed - he believes it will give "very respectable returns" but not like the performance of the last three years. He also expects capital appreciation of 5 to 10 per cent per annum over the next few years.

Hibernian Property was hit by outflows even though it had a high liquidity rate of 7 per cent. Hugh Lenihan, fund manager, property at Hibernian Property attributed the outflows to his single premium business. Liquidity is now below 5 per cent.

For the rest of the year he sees "pretty flat yields easing slightly" but no major adjustment. He said property funds "should remain in positive territory over medium territory". And some investors may see the drop in the encashment values "as a bit of an opportunity."