GLOBAL - The commercial real estate market in the UK recorded the strongest returns for four years in 2010, while the market in Japan continues to suffer after two and half years of falling capital values, according to the latest data from Investment Property Databank (IPD).

IPD's UK Monthly index posted a total return of 14.5% for the whole of 2010, outstripping the 2.5% return recorded a year ago.

Capital values rose by 6.9% in 2010 - although the final quarter saw only a modest rise of 0.3% - after falling by 5.6% in 2009, but income on UK real estate was actually down in 2010, from 8.2% in 2009 to 7.1%

The story behind the performance of the UK commercial property market in 2010 was one of decelerating capital appreciation over the first half of the year, before rates of growth weakened to a near standstill over the final six months, IPD said.

Yield compression was the principal driver of capital growth, with initial yields falling 50 basis points to 6.5% by June, after which yields shortened by 10bps for the final six months of the year. Over the full year, rental value growth fell by a modest 0.8%.

Phil Tily, UK and Ireland managing director at IPD, said: "The rebound in capital values, which emerged so aggressively at the back end of 2009, had virtually run its course by the midway point of 2010.

"The recovery that has emerged over the last 17 months has been unevenly driven by London, and the capital's office market in particular, which has seemingly been driven by a combination of global as well as domestic economic forces.

"A clear divide has returned to the UK property market - London versus the rest of the UK - which will be exacerbated as the impacts of the government's budget cuts take hold during 2011."

Over three and five years, bonds come out on top between the three asset classes, with 7.7% and 5.9%, respectively.

This compares with 1.4% and 5.1% for equities, over three and five years, and -3.2% and 0.2% for UK commercial property, respectively.

Meanwhile, the latest numbers from IPD's Japan Monthly Indicator showed Japanese commercial real estate markets have fallen by close to 20% over the two and a half years leading up to the end of the third quarter of 2010.

Japan, the world's second-largest commercial property market by value, is one of the few major real estate markets to continue to record capital depreciation, reflecting the country's weak economic growth.

By the end of the third quarter 2010 - the point at which IPD has its most current Japanese data - the UK, the US and Australia had all emerged into positive capital growth.

In the UK, the rebound was 17.4%, while the US had risen by 5.5% over the previous six months and Australia had recovered by a modest 1.1%.

But in Japan, the annual rate of capital depreciation was -6.3% at the end of September 2010 - the shallowest rate of capital decline since December 2008 and a significant improvement on the -12.2% annual capital growth rate in September 2009.

Toshiro Nishioka, managing director at IPD Japan, said: "There is no immediate end in sight to the two-and-a-half-year unbroken period of capital write-downs.

"Each quarter brings, at best, modest improvements. The market would benefit from increased transactions, which would boost confidence and provide a deeper insight into the property fundamentals."