Sweden's real estate market returned to double-digit annual total returns (10.4%) in 2010, driven by a comeback of capital appreciation after a -11.4% two-year fall in values, according to the IPD Sweden Annual Property Index.

The headline annual return is comprised of 5.0% capital growth and 5.2% income return and reflects positive capital and rental value growth in all sectors and market segments, except industrials. It is the eighth double-digit annual total return in the index's 14-year history, comfortably outperforming the 1.3% returned in 2009.

The drivers of the return to capital appreciation were a combination of a positive valuation impact at 2.8% and a year-on-year 200 basis points improvement in rental value growth - from 0.1% in 2009 to 2.1% last year.

Through the worst of the re-pricing cycle, rental value growth at the all-property level remained positive, underscoring the income stability of the investment market in Sweden, IPD noted. There were however significant differences between sectors. Offices have seen significant capital growth in 2010 but capital values continued to decline for the third consecutive year in the industrial sector. In terms of performance, offices delivered the strongest total return, at 10.6%, while industrials were weakest, at 4.6%. Retails returned 10.4%.

'Capital values declined significantly in Stockholm CBD offices during the financial crisis but bounced back strongly in 2010. The total return was 13.8% which can be attributed to a 30 bp yield compression and 5% market rental value growth,' said Christina Gustafsson, managing director of IPD Norden.

Compared to other Swedish assets, direct property investments trailed equities and property equities but were ahead of bonds during 2010. Property equities had an especially strong year with a total return of 50%, while equities returned 25%.