Cities in the emerging markets of central and eastern Europe as well as secondary cities in established markets are set to benefit from the excess of investment in European commercial property this year, a joint report by the Urban Land Institute (ULI) and PricewaterhouseCoopers has suggested.

Reading and Cambridge will be among the locations to increase their share of the EUR 151 bn invested annually in European property at the expense of London in 2007. While the British capital ranks the lowest in terms of city risk and is the top prospect for rental growth, investors are worried major infrastructural projects will drive up construction costs, according to the fourth annual 'Emerging Trends in Real Estate® Europe 2007' report. These concerns have allowed Paris to retain its first place position just ahead of London in the report's ranking of city return/risk prospects.

Eastern promise

'Some of the strongest markets in 2007, such as London, are now becoming 'hold' markets because they are close to the end of their cycle and there is a risk that yields will soften,' said Bill Kistler, president of ULI Europe. As a result, Kistler said, understanding local property market fundamentals was the key to successful investment in 2007 'whether that is appreciating labour force issues in London in the run-up to the Olympics, or rising Eurozone interest rates and heavy levels of household debt in Spain.'

The Bulgarian capital Sofia and Romania's Bucharest will be two of the cities in the emerging markets of Europe to draw in more property investment in 2007. Another significant trend identified by the report is the resurgence of Germany, with Munich and Hamburg ranked in the top 10 for the first time. Munich climbed 13 places to fourth place while Hamburg took ninth place after rising five spots. Rising office demand, a vibrant city centre and educated workforce were key attributes for Munich. Around €41bn has been invested in Germany over the last two years and reflects the growing economic optimism in the country, the report said.

Teutonic triumph

'Germany has been resurgent in the last two years. International investors with capital to spend have targeted the market and this has flushed out institutional and government stock. This, combined with improving fundamentals, ensures that Germany will be the hottest market for 2007,' Kistler noted.

Some 400 senior executives in the real estate sector were interviewed by the report's authors to identify Europe's top cities for real estate investment and the challenges ahead. In general, the investors expressed optimism about 2007, but they warned the sector is near its peaks as European markets are awash with capital - thanks to optimism at home and abroad. Of those interviewed 52 percent forecast an oversupply of capital in 2007.

Henrik Steinbrecher, European real estate leader, PricewaterhouseCoopers commented: 'Despite predictions of a calmer investment environment in 2007 and single-digit returns, equity capital is continuing to pour into the European real estate sector. This trend is expected to continue with strong growth flows from the Middle East, Asia and Australia. Increases in debt capital are also expected, however, interest rate increases may keep the market in relative balance.'

Ranking of cities for city return/risk prospects

2007 City 2006 Change

1 Paris 1 -
2 London 2 -
3 Stockholm 6 +13
4 Munich 17 +13
5 Lyon 8 +3
6 Helsinki 3 -3
7 Madrid 4 -3
8 Barcelona 5 -3
9 Hamburg 14 +5
10 Copenhagen 9 -1
12 Edinburgh 10 -2

'Emerging Trends in Real Estate® Europe 2007' is launched at ULI's European conference in Paris. Click on the link below for further coverage of the report. PropertyEU is attending the ULI conference in Paris and a report on the proceedings will appear in Thursday's PropertyEU newsletter.