The FTSE UK Commercial Property Index declined by 0.46% during October. The cooling of the UK property market 'affected the values of underlying properties in the index', but the decline was exacerbated by the credit crunch in global capital markets.

The FTSE UK Commercial Property Index declined by 0.46% during October. The cooling of the UK property market 'affected the values of underlying properties in the index', but the decline was exacerbated by the credit crunch in global capital markets.

In contrast to the equities market, valuers of real estate appear to be influenced by a lack of information more than by real data. Sentiment is becoming increasingly relevant in the valuation of property assets as valuers are arguably in a phase of price discovery rather than basing numbers on actual evidence. The consensus appears to be that valuations will drift lower for the rest of 2007 before prices begin to stabilise and total returns from commercial property move into positive territory.

Equities have now outperformed real estate for the last year. However, on a risk-adjusted basis, the low volatility of real estate returns (just 2.45%, compared to equities’ 14.51%), continues to attract long-term investors. Ultimately, however it is REITs which have faired the worst, down 19.45% over the last 12 months with a fall of 3.58% in the last month alone. Hedge funds have, despite recent liquidity issues, shown their resilience, returning 0.91% for the month of October, whilst gilts delivered 0.86% for the same period.