December saw the worst fall in returns and capital values ever recorded by the Investment Property Databank Monthly Index.

The index, which samples property with a value of £51bn, showed that capital values fell by 4.2% in December. With income return at 0.4% and rental value growth at 0.2%, this meant that property produced a total return of -3.7%.

Down for the year

The monthly index, therefore, shows that property provided a total return of -5.5% in 2007. The annual index, which takes a larger sample of properties and is released in February, is expected to show a very similar result.

‘The UK property market is, then, in the midst of a rapid correction in pricing,’ IPD said. ‘The key question is whether the property sector will be hit by an occupier market downturn as well.

‘So far, all property annual income returns held steady at 4.9%. Annual rental growth also remains positive across sectors, although it did tick down a from 3.8% in November to 3.5% in December. We saw rental growth soften a touch across all three sectors.’

City pain

On an annual basis, capital values showed a 10% fall. Retail was the worst performing sector, with capital value falls of 11.8% and a -7.7% total return.

In December however, offices were the worst performing sector, with City of London offices particularly badly hit. Capital values in this sub sector dropped 6.9%, and it showed annual total returns of -7.8%. West End offices were the only sub-sector to produce a positive return for the year, producing 2.8%.