Capital values in Italian commercial property suffered the steepest decline in its seven-year history, falling by -4.6%, according to the IPD Italy Annual Property Index. However, 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 has been 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%. Yield impact was -3.9%.
At the sector level, the sharpest yield impact was in industrials, at -7.8%, followed by retails and offices, at -4.5% and -2.6%, respectively.
Industrials 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 retails and offices were milder, at -5.4% and -3.5%, respectively both sectors somewhat insulated from deeper falls by restricted supply of prime assets.
Capital decline in Italy's office sector, dominated by Rome and Milan CBDs, differed slightly in resilience. In Milan, capital values contraction at -4.2% last year, while Rome suffered capital depreciation for the first time, at -2.6%.
Luigi Pischedda, IPD's Country Manager for Italy, said: "The lower annual returns delivered by the Italian commercial property was clearly driven by a continued capital value re-pricing. 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."
Direct property underperformed all other asset classes in 2009, but still shows higher returns than equities (as measured by the FTSE MIB index) and property equities (as measured by the DS Real Estate Index) over three, five and seven years and performs better than government bonds (as measured by the JPMorgan GBI Italy Index) on a five and seven year period.