ITALY - Capital values in Italian commercial property suffered the steepest decline in its seven-year history, falling by -4.6% in 2009, according to Investment Property Databank (IPD).

That said, the IPD Italy Annual Property Index showed a robust 5.7% income return was sufficient to lift annual total returns modestly into positive territory - at 80 basis points, compared to 2.3% in 2008.

The capital depreciation was driven by a strong negative yield impact, which measures the influence of movements in yields on capital values, and the first-ever negative rental value growth on record, at -0.7%.

The yield impact across Italian real estate was -3.9%, while at a sector level the sharpest yield impact was in industrial property, at -7.8%, followed by retails and offices at -4.5% and -2.6% respectively.

Industrial real estate recorded the steepest capital value decline, at -6.4%, in the 12 months to December 2009, driven by a higher vacancy rate owing to stagnation in the sector within the Italian economy.

Capital decline in retail and offices was milder at -5.4% and -3.5% respectively - both sectors somewhat were insulated from deeper falls by restricted supply of prime assets.

Capital decline in Italy's office sector, dominated by Rome and Milan central business districts, differed slightly in resilience.

In Milan, capital values contraction hit 4.2% last year, while Rome suffered capital depreciation for the first time, to -2.6%.

"The lower annual returns delivered by the Italian commercial property was clearly driven by a continued capital value re-pricing," said Luigi Pischedda, IPD's country manager for Italy.

"Yield expansion and first time negative rental growth is a recipe for capital depreciation. The problem on the horizon for investors from here is the strength of the domestic economy and of the underlying occupier markets.

"It should be noted, however, that unlike in many other European countries annual total returns have remained in positive territory since the credit crunch," argued Pischedda.

Direct property underperformed all other asset classes in Italy in 2009, but still showed higher returns than equities (as measured by the FTSE MIB index) and listed real estate (as measured by the DS Real Estate Index) over three, five and seven-year periods.

It also performed better than government bonds (as measured by the JPMorgan GBI Italy Index) on a five and seven-year period.