Paris once again leads this year’s list of top real estate investment markets in Europe, according to a highly regarded real estate investment report...

Paris once again leads this year’s list of top real estate investment markets in Europe, according to the highly regarded real estate investment report, 'Emerging Trends in Real Estate Europe 2007', published this month by the Urban Land Institute (ULI) and PricewaterhouseCoopers LLP. Paris rates highly for both total return prospects and low risk, and thus its risk-adjusted total return prospects are the best in Europe.

Survey respondents point to the city’s economic stability, sustainability and its status as a global gateway as the main reasons for its top ranking as an investment market. Ample urban regeneration and redevelopment opportunities also attract investors, notes the report. As a top market for the past several years, “Paris still has good prospects for the next two years,” the report says.

Other European property investment hotspots

As was the case last year, London is rated a close second to Paris as an investment market. Survey respondents named London as the European city offering the least investment risk and the best prospects for rental growth, “reflecting optimism for property value trends supported by income growth,” the report says.

Stockholm, in third place, continues to move up the list for overall investment ratings, as its redevelopment prospects continue to strengthen.

Munich is ranked as the fourth best investment market, moving up from 17th place last year. “Rising office demand, a vibrant city centre, and an educated workforce create synergy for this city,” says the report.

Lyon rounds out the top five investment markets, with many respondents viewing that city as an attractive lower-cost alternative to Paris.

Other cities listed as strong “buy” markets: Madrid, Barcelona, Hamburg, Istanbul and Moscow. Other cities with strong “hold” ratings: Copenhagen, Edinburgh, Vienna, Brussels, Dublin and Amsterdam. In addition to Stockholm, other cities with relatively balanced buy-sell-hold ratings: Helsinki, Zurich, Milan, Prague, Rome, Lisbon, Warsaw, Athens, Budapest, Berlin and Frankfurt.

In terms of city development prospects, the report ranks Istanbul highest, pointing to its movement as a emerging global market. “The market still needs many developers rather than pure investors... real estate sectors are now in a learning curve,” notes one respondent. Says another: “Istanbul will be the star of the next decade.”

European residential outlook - France and Eastern Europe are investors' favourites

The residential sector continues to provide attractive opportunities for investment and development, due to its steady cash flows.  ULI & PWC believe this sector is likely to provide modestly good total returns and rent increases for the coming year.

France remains a favourite among residential property investors. Central and eastern European markets are also seen as offering value, primarily due to the potential of redeveloping housing, much of which is now viewed as poor quality. Larger cities in Poland and the Czech Republic are among those offering substantial opportunities. High housing demand in Turkey also keeps it ripe for investment.

The survey suggests caution is advised for the German residential market.  And many respondents view residential prices in Spain as "absurd".  However, other respondents believe demographics in that country will continue to support the high residential prices.

Buyers outweigh sellers by two to one

Emerging Trends notes that prospects for profitability are considered favourable for real estate firms of all types, and the report shows that buyers outweigh sellers by two to one. Despite some concerns about global investors bidding up prices, few respondents indicated that European real estate is “in the grip of completely irrational exuberance,” the report says. “The assumptions people are making may be optimistic, but not fundamentally ridiculous or irrational.”

Still, despite the optimistic outlook for European real estate, the report cautions that the double-digit returns of previous years are not likely to continue. Most respondents indicated that yield/cap rate compression is largely over and that yields will remain stable in 2007. “If you want to make returns, you’d better focus on markets that have good prospects for rental growth,” one participant says.

The report notes that the “chase for higher yields” is causing investors to look at alternative investment properties as varied as petrol stations, student housing, marinas, motorway services, prisons, car parks and windmills— “anything producing income.”

ULI, based in Washington, D.C., is a global education and research institute dedicated to responsible land use. Its Europe headquarters, ULI Europe, serves the Institute’s 2,100 European members. PricewaterhouseCoopers LLP is the world’s largest professional services organisation. Emerging Trends, which covers 27 markets in countries throughout Europe, is based on surveys and interviews with more than 390 of the industry’s leading authorities.

The report released this month is the fourth annual European edition of Emerging Trends in Real Estate. Full copies of the European report are available at www.uli.org/emergingtrendseurope.