The property investment market, or what's left of it, continues to trade in a subdued fashion at prices that represent a 60% fall from peak values in December 2007. According to the IPD capital index, prime property is at valuations last seen in March 1999. As the primary source of this country's current economic woes it is probably getting its just desserts.

That said, if there was a functioning banking system there is little doubt we would have reached the market floor by now. Unfortunately, this is not the case and values remain at the mercy of the limited demand from international investors and a relatively small cohort of private Irish investors.

Capital values have actually fallen to such a level that they are now only marginally ahead of the rate of inflation for the past 25 years. The removal of upward-only rent reviews last March is reported to be having a limited impact on the investment market, for two reasons. First, there has been a limited supply of product sold in the marketplace which is the subject of leases entered into post-March 2010. Second, rental levels in leases entered into after this date are low and thus of limited concern to valuers. Consequently the long-term impact of this change is still unknown.

Last year there were about €185m worth of deals in Ireland. This excludes the €52m sale of an Irish Life office portfolio as this was essentially an inter-fund transfer despite being reported as the largest deal of the year. The annual figure for 2009 was €137.5m, so last year's turnover level is actually positive news. By way of nostalgia, the Irish market peaked at a turnover of almost 20 times the 2010 figure, reaching over €3.5bn in 2006, with the irony being that two of the largest deals back then were the sale of Bank of Ireland's and AIB's headquarters.

Total returns from commercial property were again in negative territory for 2010, but only just. Prime yield levels are stabilising at about 6% for retail, 7.25% for office and 8.75% for industrial, with the negative overall return derived from a continued perceived fall in rental values across all three sectors. This neutral or negative return is likely to continue into early 2011, especially in the retail and industrial sectors, almost entirely because of continued uncertainty about the floor of the rental markets. Hopefully, after the election, in mid-2011 we should see the bottoming out of the rental slide that is already occurring in the prime office sector and in the stronger regional retail schemes.

In the office sector there has been an increase in activity and this remained consistent throughout the first three quarters. Prime office rents have fallen by up to 45% in central Dublin from the market peak of €60 per square foot to about €35 per square foot for new buildings and letting transactions completed at levels from €30 to €35 per square foot. Leases that have been granted recently tend to incorporate multiple break options determined by the lease length and incentives provided. Inducement packages are commensurate with the lease length, but typically tenants will expect around 12 months' rent free based on a five-year lease.

Office vacancy rates in Dublin stand at about 24% but it is evident there will be a lack of high-quality office accommodation due to the lack of new planning applications in the city centre and Dublin 4. This will lead to increased demand for space once the economy begins to improve.

On the retail side, the market is continuing to polarise between the big and the small. Large regional retail centres are performing relatively well with many reaching full occupancy in 2010, albeit at significantly discounted rents. The prime high streets in Dublin, particularly Henry Street, are also experiencing good demand with zone A rents emerging of about €375 per sq ft. Grafton Street, which is soon to see the opening of the Disney Store, was seeing about €425 zone A but a recent court lease renewal at sub-€300 zone A has seen valuers scrambling for their calculators.

For secondary and off-prime locations the story is seriously negative with continued vacancy and tenant impairments. A reduction in consumer spending in the latter half of the year coupled with recent severe weather conditions will hit retailer turnovers and is likely to contribute to further retailer failures in 2011.

The focus of transactional activity in 2010 was in investments let to strong covenants such as banks and publicly quoted companies with 10 years-plus on the leases. The signs at the beginning of 2010 of international funds trawling the market became a reality with the acquisition of two buildings on Grafton Street by foreign entities for €35.4m (German fund GL and a UK private individual) and the acquisition of Eircom's Management Network Centre in Citywest by British firm London & Regional for about €20m. However, after almost 12 months of 'negotiation', F&C REIT has still not yet exchanged on the Liffey Valley shopping centre for in excess of €300m, which would have obviously had a dramatic effect on the 2010 statistics.

Despite initial indications to the contrary, Nama did not produce any tangible product in 2010. We now look to the New Year in anticipation of disposals arising out of approved Nama 'business plans' or indeed borrowers being put into receivership. However, the market for this or any other product in the short term looks set to be highly dependent on international investors or high-net-worth private individuals. There is little doubt that the tumultuous economic events of the past six weeks will have largely scared off the former group. However, as matters hopefully settle down in 2011 it is likely they will return in the middle of this year. In addition, I anticipate that 2011 will see the re-emergence of domestic institutional investors seeking what is now a high-yielding investment capable of matching the ever-increasing annuity needs of the pension market.

I would also expect that we will see the introduction of Real Estate Investment Trust (REIT) legislation. This will facilitate the flotation of sector-specific property portfolios in conjunction with specialised management teams. This tax-transparent structure will provide Nama with a credible way to dispose of significant tranches of loans without having to rely exclusively on international funds whose price expectation may be even lower than the November 2009 Nama transfer prices.

One of the major opportunities of 2011 will be vacant or weak-tenanted and over-rented properties where purchasers can identify replacement occupiers at reasonable rents or purchase on the basis of informed rental growth expectations. For example, one of the great unknowns at the moment is the true open-market value of retail properties. However, if an investor has an insight into the rental level that can be sustained by the tenant, then they can acquire with at least a basic level of confidence. On the office side, it appears that most international demand is focused on Dublin city centre due to the positive rental growth story.

Rod Nowlan is investment director at Bannon Commercial