AUSTRIA - Austrian real estate returns outperformed both equities and bonds in 2007, despite a decline in retail - the best performing sector.

IPD figures published last week show property returned 6.8% last year, compared with a negative return of -7.4% for equities and 1.5% for bonds.

The three-year annualised average return was 6.4%, with the retail and residential sectors returning 7.9% and 6.7% respectively.

Retail was the strongest commercial property sector in 2007 for the fourth consecutive year, returning 7.4%.

However, in contrast to the average 7% commercial property return, up from 5.9% the previous year, the retail figure was 140 basis points lower than the previous year.

"Retail is still the outperforming sector - but it's also seen the largest reduction in growth," said IPD director Nassos Manginas. "It may well be that it will fall further but whether there's a new pattern emerging I could not say."

The residential market likewise outperformed the average, returning 7.1% in 2007, despite a regulatory cap on rental increases in the social housing market.

"Residential is limited, but it's only part of the market, and social housing is only part of residential," said Manginas. "Residential has performed well in previous years, and it has seen the strongest increase."

He pointed to an improvement in the office sector, despite an otherwise disappointing performance, thanks largely to refurbishment in earlier years and increased capital expenditure.

Roman Herzog, a property analyst with Austrian bank Raiffeisen, reaffirmed the bank's forecast that the Austrian property market would remain stable at least for the next two years.

"There is no slump, and returns won't drop more than 5-10%. Residential is doing well, and you're seeing good property, especially in Vienna," he said. 

"The rental market is hard to predict, but don't expect it to peak in 2008," he added.