Investors in property need to be a little careful about bare performance figures. Sometimes there is more to the numbers than meets the eye.

For institutional investors with a reasonable exposure to UK commercial and industrial property, 1997 was a good year. Investment Property Databank (IPD), which monitors the performance of properties representing well over 90% of the UK market, reported an average total return of 16.8% for business property owners in 1997.

If moves to enhance the value of property portfolios - trading, refurbishment and development - are included, total returns were even higher at 17.8%. The 16.8% return from standing investments compares with a long-run (1980-97) average annual return of 10.1%. The only dampener on this excellent performance was that returns on equities, at 22.6% for 1997, again outpaced those on properties while even UK government bonds showed returns of over 15% - all based on the IPD figures.

In other words, the UK business property market has been on the upswing of one of its very pronounced periodic cycles. The odd point is that 1997's returns are not the best achieved this decade. In 1993 property values actually rose by 20% at a time when most industry watchers would have said that the property industry had barely recovered - if it had recovered at all - from its turn-of-the-decade slump.

This is where the bare performance figures need treating with caution. The 1997 performance was in reality considerably better than that for 1993, since it was based on rising rental values. That 16.8% total return was backed by average rental growth of 8% across all classes of business property, with office property achieving rental growth of 9.8%. A fall from 8% to 7.6% in the average yields on which properties were valued was a useful but less significant influence.

This is important. In the long run the real support for rising property values comes from a rise in the rents that they are capable of producing. In this respect, 1993 was an oddball year. Rental values were still falling quite sharply in 1993. But as investors looked for types of investment that could offer them a better income than bonds - where yields had fallen significantly - they turned to property and bought it in large quantities. This forced property prices up and property yields down. The increase in capital values that resulted provided that freak performance figure. But, without the backing of rising rents, it was bound to be suspect. A rise in the yields on alternative type of investment could have seen property giving up all its gains, though in the event this did not happen.

So the performance of property in 1997 was soundly based and good returns have continued into 1998. But there is some evidence that UK commercial property may be close to or just past the peak of its cycle. IPD's monthly index (based on a smaller sample of properties than the annual one) shows some slackening, with the rate of rental growth slipping back slightly in April and performance in the year to date not quite matching the hectic conditions of late-1997.

A survey by the Confederation of British Industry and international property adviser GVA Grimley, published in mid-June, points in the same direction. Demand for space from businesses looks like easing off, perhaps rather sooner than had been expected, as companies adjust to a cooling of the economy. While about half of the businesses surveyed reported no change in their property requirements over the six months, some 34% reported a decrease in property holdings and only 16% an increase.

Over the coming six months, too, more businesses were expecting to decrease than increase their property holdings. Since it is tenant demand that fuels rental growth, which in turn boosts capital values, some easing in rates of return from property may be expected. But just as recent performance has been soundly based, so any return to earth is likely to be a gentle one.

It is not only in Britain that prope rty returns have been good. IPD's index of Irish property showed a 25.3% overall return in 1997, while its index for the Netherlands - where residential property holdings are included - showed total returns of 12.5%. IPD's latest venture - an index of South African property produced with property industry body, SAPIX - shows returns of 15.8% for 1997. And a measure of German property performance is due from the IPD stable soon.