The real estate investment climate in Germany continues to benefit from the feel-good factor generated by the ongoing recovery, but economic weakness in France and the UK is taking its toll, according to the results of the latest Investment Climate Index released this week by Union Investment.

The diverging moods among European property investors are reflected in the index, which responded in July with a new all-time high in Germany, a sideways movement in the UK and a surprisingly sharp decline in France.

The differences in sentiment across the three most important European real estate markets are thus at their most pronounced for over three years. After the national indices displayed broadly similar trends in the period from 2008 to 2010, the spread between Germany on the one hand and France and UK on the other rose to over 4 points during the course of the year. This represents the greatest level of divergence since autumn 2008.

As confirmation of the buoyant economic situation, the location factors and general environment indicators rose particularly steeply in Germany and drove the national index to a new peak of 72.3 points (a 0.9 point increase over the last survey in December 2010). Meanwhile, weak economic data and government spending cuts sapped the confidence of investors in the UK. At 68.2 points (+0.1), the UK index failed to progress from the figure recorded at the start of the year. Overall, the forecasts from property professionals for the UK economy are significantly worse than in the other two countries, with only 8% of British investors surveyed anticipating an improvement over the next twelve months.

'Correspondingly, only 12% of British property investors expect a better general environment for office investment in the UK over the coming 12-month period. This is a strong indicator that confidence in the domestic markets has suffered and further strains are expected,' said Olaf Janssen, responsible for real estate research at Union Investment. 'The business climate has deteriorated in the UK in a range of sectors, particularly the service sector - which accounts for much of the demand for office space. Investors are responding accordingly in terms of investment decisions,' added Janssen.

London and Paris are among the property markets most likely to display overheating tendencies over the next 24 months according to the investors surveyed. The brief euphoria in France was interrupted even more abruptly than in the UK. A total of three of the four indicators slipped below 70 points. This was particularly noticeable with regard to the 'expectations' rating, which fell by 7 whole points.

'The reaction of the index, which recorded the biggest decrease since 2006, falling 2.7 points to 67.9 and dipping below the figure for the UK again, reflects the structural crisis affecting the French economy, which is most apparent in the country's high budget deficit,' said Janssen. The reduced expectations in France match the subdued mood in the country: only half of the real estate companies surveyed take an optimistic view of their own business prospects over the next twelve months.