GLOBAL - The Italian commercial real estate market has continued its gradual decline in capital values in the first half of 2010, according to Investment Property Databank (IPD).

The IPD Italian bi-annual property index showed market values continued to slip in the period between January and June, albeit a very mild depreciation of -0.3%.

Compared with some real estate markets in Europe, the re-pricing in Italy since the onset of the global financial crisis has been mild, at just -5.3% over the last two and a half years.

Rents have declined 1.7% across this period, while initial yields have expanded by 30 basis points to 6.2%.

Luigi Pischedda, country manager for Italy at IPD, said: "Like a number of markets throughout continental Europe, the Italian property market is governed by stable property fundamentals, which have helped insulate against the full force of the global financial crisis.

"Rents and yields, the drivers of capital growth, have moved only marginally compared with that seen in the UK and US.

"As a consequence, Italy is failing to reap the recovery bounce other markets have started to benefit from."

Investors saw positive returns during the first half of the year, as a 2.7% income return contributed to a six-month total return of 2.4% - the largest biannual total return since Italian commercial property starting re-pricing.

IPD attributed slowdown in capital depreciation to fractional weakening of rents and yield expansion.

Italian retail actually saw the return of capital appreciation, albeit at a modest 20 basis points, and was followed by the industrial sector, which was virtually flat.

The office sector, however, continued to depreciate at 0.5%, although this was half the rate of the previous six-month period.

Similarly, IPD also found that real estate capital values in Japan had failed to recover in the second quarter.

Many investors are anticipating a market recovery in Japan, but the IPD Japan Monthly Indicator showed capital growth reached a plateau between April and June.

The annual rate of capital depreciation reached the bottom in May 2009, at -13.8%.

Thereafter, the pace of write-downs weakened over the 10 months to March, almost halving to -7.1%.

Over the subsequent three months to June, the rate of declines reached a plateau, running at an annualised rate of -7.2% by the end of June.

Toshiro Nishioka, managing director at IPD Japan, said: "We can now definitively see the expected recovery in Japan's real estate market has failed to materialise - for now at least.

"This can be explained by macroeconomic factors, as well as property fundamentals.

He added: "During the second half of 2009, market sentiment improved as confidence over the state of the general economy returned - based on the belief that the 'worst was behind us'.

"However, into the first half of this year, the expected recovery did not manifest as strongly as many expected. The Bank of Japan recently admitted the Japanese economy remains fragile due to the appreciation of yen."