Portuguese commercial real estate has delivered its strongest investment performance in three years, with a 4.2% total return for 2010, according to the IPD Portugal Annual Property Index.

The positive performance brings an end to two years of declining returns, although it remains well below the double-digit total returns achieved between 2004 and 2007. The composition of the headline return still includes a negative 1.5% capital depreciation, meaning the positive performance was driven entirely by strong income returns, at 5.8%.

In 2008 and 2009, values fell by -3.3% and -5.6%, respectively. This was mainly driven by falling rental values, at -0.8%, while yields compressing by 10 basis points to 7.2%.

Industrials recorded the best returns at sector level, at 6.1%, and was the only sector to achieve positive capital growth, at 0.7%. Retails and offices returned 3.9% and 3.5% respectively, and though capital depreciation is less than in recent years, it is still a reality for both, at -2.2% for Retail, and -1.6% for Offices. All sectors improved in performance last year, with Retails recording a significant turnaround; total return for the sector rose from -2.8% in 2009 to 3.9%.

Last year Portuguese commercial property outperformed equities, at -6.6%, and bonds, at -8.8%. Over a three, five and 10-year year period, Portuguese commercial property has outperformed all other asset classes with annualised total returns of 2.4%, 6.2% and 8.8%, respectively.

'The results achieved by the Portuguese market in 2010 follow the recent recovery trends seen in other real estate markets worldwide,' said Luís Francisco, country manager for IPD Portugal. 'In a difficult year for the Portuguese economy, where the macro-economic situation remains far from certain, the market has shown signs of recovery after two years of negative movement, and, in comparison to other asset classes, has shown itself the most stable.'