ITALY - Italian real estate delivered a 5.2% total return for investors in 2010, despite capital values continuing to slide, according to Investment Property Databank (IPD).

The latest headline result from the IPD Italy Annual Property Index is a marked improvement on 0.8% total return reported for 2009, but capital values have now declined annually for the third consecutive year.

Income returns were responsible for the positive total return and at 5.7% reached their highest level in five years.

Capital values fell in 2010 but were almost flat at -0.5%, itself a marked improvement on the -7.8% seen in 2009.

Italy is among a number of European commercial property markets still experiencing capital decline in 2010, including Spain and Portugal.

Falling rental values contributed to the negative capital movement, continuing the rental decline started in 2009, dropping a further -0.7%, but vacancy rates fell for the first time since 2007, to 7.3%.

At the sector level, as the chart above shows, Industrials outperformed both Offices and Retails, delivering a total return of 7.1% for the year, driven entirely by a 7.2% income return.

Luigi Pischedda, IPD's country manager for Italy, said: "As we have already seen from the IPD Italy Bi-Annual Index, capital depreciation has continued into 2010, though at a shallower rate than in previous years.

"Total returns, however, have returned to strong positive territory, and the Italian commercial property market is recovering in line with other European nations."

Italian offices and retail assets recorded capital depreciation for the year, at -0.6% and -0.4% respectively, while Industrial capital movements stabilised at zero.

Three years of negative capital movements, since the start of the financial crisis, has seen the retail sector lose 10.1% of its values, while the office and industrial sectors have recorded a cumulative -6.1% and -10.2%, respectively.

"Overall, the figures hint at a new phase in the property cycle, where declining values seem to have bottomed out," Pischedda said.

"Early signs of growth are appearing in some segments, but this is very much dependent on geography and asset class.

"For instance, within the shopping centres segment, which is underperforming as a whole, we are seeing very strong returns from large, secure shopping centres, but negative returns for the smaller centres.

"Like the rest of Europe, Italy is seeing a great diversity as investors hunt for well located, secure investments."