Commonwealth Property Office Fund (CPA) reported a 0.7% or $5.4 million decrease across eight properties in its portfolio for the quarter. The company said it expected softening valuations to continue across the portfolio.

The property fund said it continued its focus on the fundamentals of active asset management and as a result had maintained its portfolio occupancy at 98.9% and gearing at 29.9%.

"It is estimated the fund's net tangible asset backing decreased 1c per unit from $1.62 at 30 June 2008 to $1.61 per unit at 30 September 2008," the company said.

Fund Manager Charles Moore said the pressure on valuations from softening yields continued to flow through the CPA portfolio with most market capitalisation rates softening by 50 basis points to 75 basis points.

"The magnitude of the overall effect on valuations is a quality comparison between prime and secondary grade assets and the effect of reversionary market rental growth," he said.

Mr Moore noted that office space market fundamentals remained sound with vacancy levels at near historic lows.

"Tenant demand for office space has slowed and we anticipate seeing a moderate increase in sub-lease space entering the market," he said.

"Offsetting this pullback in demand, supply is being deferred and retention levels are increasing and as a result we do not expect to see a rapid deterioration of occupancy and rental levels."

At 1023 AEDT Commonwealth Property Office Fund shares were down 2.5c at $1.165.