If the commercial property investment market were a contestant on The X Factor, I am sure Simon Cowell et al would have some very interesting views on its future, especially in the final four months of the year.

First, an analysis would need to be done on the performance to date, which statistically and in every other way has been disappointing. Turnover for the half-year to June stood at €63m, which is paltry in comparison to the previous year of €355m. This figure represents seven deals which, given the numbers employed in the sector, does not make for pleasant reading.

It should, however, be seen in a slightly more positive light because, at the beginning of the year, it was all doom and gloom with no transactions in the first quarter. The subsequent deals mean there is some investor activity. It may not be stellar but it is activity, which is mildly encouraging. Transactions have included the Davy acquisition of bank branches from F&C, and the AIB sale and leasebacks. If the Royal Liver portfolio sells, it will be a good boost to the market.

Most of the yield shift has occurred and, although it was severe, it was necessary as it means the commercial investment market now becomes an attractive asset class providing higher returns. It now competes with other European markets and in some cases is better value. This assumes long income to a strong tenant.

For the next four months yields should stay relatively constant at 6.25%-7% for prime retail, 6.75%-7.5% for prime offices and 8%-plus for industrial. The key factor will be rents and how long they take to stabilise, which will determine if prices adjust further downwards. As matters stand, commercial property investment now has attractive returns to compete with the other asset classes and should continue to do so for the rest of the year.

The market needs active participants, which certainly seem to be present on the demand side with private domestic investors, albeit at low lot sizes, and some institutions. The most interesting feature here is the emergence over the past five months of overseas investors, principally German and British, who have been absent for over 10 years. The demand from these parties will be for long income to stable tenants at returns from 6.5% for offices and retail, although some do have requirements for industrial. Most of the German funds will be cash buyers requiring no leverage. However the remainder will require financing and this will be difficult to obtain for anything other than Grade A assets.

At present, loan-to-value ratios are in the region of 50%-65% with margins of up to 2% based on three-year swaps, which limits large private buyers as a substantial amount of equity is required. Most demand from private investors is up to €5m with a high proportion in the €1m-€2m bracket making the equity requirement somewhat more manageable. So while there is demand, the question is, where will the supply originate?

At present the supply side participants are institutions and corporates, and though they may wish to dispose of assets in the coming months, it is hard to see a massive supply as fund managers will not want to sell into a depressed market. This means there could be a limited supply unless the banks put private investors under pressure to sell, which would not make sense if they have performing loans that from rental payments.

The impact of Nama on liquidity is unknown but it should be positive for two reasons. The first is that a functioning banking system is necessary for a functioning property market. The second is that undoubtedly there will be a requirement for Nama to raise cash to deal with distressed development loans, the source of which could be the investment assets held as security for those loans.

I think an X Factor review could summarise the market as follows: after a virtuoso performance in 2006 and 2007, last year was when the music went flat. The market now needs a serious dose of cough mixture (easier lending conditions coupled with increased supply) which may leave the prognosis for the remainder of the year as 'room for improvement'.

Predictions

» Market turnover to be no more that €300m by year end

» Overseas funds to have acquired up to five assets

» Majority of sellers to be institutions/corporates

» Yields to remain stable

Max Reilly is national director of investment with Jones Lang LaSalle in Dublin