EUROPE - The real estate markets in Germany and Italy saw capital-value declines in 2010, according to Investment Property Databank (IPD), but both look to be recovering.

Despite a 0.9% capital depreciation, total returns for German real estate were positive at 4.2% last year.

According to the IPD Germany Annual Property index, this is the highest since December 2007 and a clear improvement on 2009's 2.4%.

A strong income return of 5.1%, which dropped only 20 basis points from 2009, drove the total return performance.

Daniel Piazolo, managing director at IPD Germany, said: "After two years of negative movements, the recovery in the German property market matches the positive returns posted by other IPD indices.

"While total return in the UK and the US has been higher - at 15.2% and 14.2%, respectively - the downturn in Germany was much less severe. Therefore, there was less rebound to follow.

"German returns are on a level with their continental European counterparts, such as the Netherlands at 4.6%, and Denmark's 5.3%."

Meanwhile, Italian commercial property values finally stopped falling over the second half of last year, registering zero capital growth, according to the IPD Italy Bi-Annual Property index.

As a result, the first indication of the Italian market's full-year capital growth is still negative, at -0.3% - making it one of only three European commercial real estate markets that have so far registered annual capital depreciation, behind Ireland at -3.3% and Germany at -0.9%.

The IPD Italian Annual index, covering a much more comprehensive sample of the market, is published in two weeks.

The Italian property market still posted a positive total return for the year, at 5.2% - almost entirely driven by income return of 5.5%.

The total return for the second half was 2.7%. Rental growth mirrored capital growth trends in H2, again at 0%, delivering an annual rental growth of -0.2% in 2010.

Luigi Pischedda, IPD's country manager for Italy, said: "It looks like the Italian commercial property market is lagging slightly behind the rest of Europe in terms of capital recovery, but the results are still encouraging.

"Rental growth stabilised in the semester, rising only modestly in the Milan and Rome office markets, where demand is boosted by limited supply.

"Nevertheless, income returns have remained steady and, unlike the rest of Europe, Italian returns never fell negative."

Pischedda added: "Capital growth is not yet positive, but improvements in market fundamentals might promote a modest recovery into 2011, particularly for more central, well-tenanted assets."