UK - The recovery in capital values in the UK real estate market slowed to a crawl in October and is expected to see a reversal in fortunes over 2011.

According to the latest figures from Investment Property Databank (IPD) UK Monthly index, commercial real estate values in the UK rose by just 0.1% in October, suggesting the 15.9% upturn in values since August 2009 has come to an end.

Invista Real Estate Investment Management has predicted that capital values will begin to fall in 2011, citing the Investment Property Forum (IPD) consensus and property derivatives pricing as indicators.

But the fund manager said total returns would remain positive during the next year, as capital declines were offset by improving income returns.

Invista's latest quarterly UK Commercial Property Market Overview report concluded that prime property with secure income would continue to be in demand, maintaining the two-tier market between primary and secondary assets that has arisen in the UK.

Jeremy Marsh, director of research and strategy at Invista, said: "Income will be the most important factor in UK commercial property market returns over the coming year, and investors will look for prime property to maintain their returns.

"The high margin between property and government bond yields should protect performance across the wider market in the medium term, but we expect values will fall outside the prime sectors of the market and will be pushed down further as the public spending cuts come through."

The aggregate income return in October was 0.6%, according to IPD, leading to a total return of 0.7% for the month.

Phil Tily, managing director at IPD UK, said: "The continued modest positive capital growth in the UK commercial property market reflects an attenuation of yield contraction and rental declines.

"Over the year to date, values have risen by 6.5%, predicated on a 70 basis point yield contraction, to 7.4%. Rents have had a negative influence, falling by 1%, over this time period."

Invista conceded a focus on prime, income-secure properties would represent a reversion of the trend that saw some investors begin to look at non-prime assets earlier this year.

The UK government's spending cuts are expected to reduce demand for office and retail space substantially, Invista said, particularly in secondary regions.

The report said overall institutional demand for property had weakened since autumn 2009, when a "surge of new money led to substantial growth in capital values".

The report added: "The latest figures suggest a majority of institutions are planning to reduce their investments in the asset class for the first time in at least a year, and fund managers already seem to be experiencing a substantial decline in flows."