Is the European property market overheated? Many observers say yes but still favor investment. London has certainly outpriced itself, becoming the most expensive city in the world in which to live and work, followed by Paris.

According to the group’s mid-year forecasts, confidence across the entire UK property market has caused Atis Real Weatheralls to double its 2004 forecasts for total investment returns to almost 15 percent following a much stronger than expected first half of the year.

The forecasts, which would mean investment returns reaching their highest level in five years, conservatively anticipate that interest rates will continue to rise, squeezing borrowers and prompting investment activity to slow as investors are attracted to opportunities overseas.

This assumption would see total returns for 2004 reaching 14.8 percent, compared with Atis Real Weatheralls’ January forecast of 7.6 percent.

If, however, investment demand continues at existing rates through the rest of the year, returns could be as high as 17 percent.

“Our January forecasts for 2004 predicted that private and overseas investors would find 2003 prices too keen, particularly given the turning point in the interest rate cycle,” said Keith Steventon, director of research for Atis. “What we have actually seen is sustained confidence in the sector, reinforced by the return of the institutions, who have reweighed their allocations and set new target rates for property.”

Growth Prospects

While London has the distinction of being the most globalized metropolis in Europe, Paris, as reported by IVG Immobilien, one of Europe’s large real estate stock companies, has the better growth prospects, more office space and superior infrastructure.

Without a doubt, London and Paris are in a class by themselves when compared with other European markets.

“As far as revenues and project development are concerned, they are far ahead of cities like Frankfurt, Milan, Munich or Brussels,” said Thomas Rucker, marketing director for Germany-based IVG Immobilien.

Elsewhere in Britain, scores of innovative business parks also offer Class 1 space. The concept of the business park is relatively new in Great Britain.

“They have only been a feature of our market for the past two decades,” said Mike Ayton, director of CB Hiller Parker.

Ayton pointed to their success. Farnborough Business Park, for example, is now home to the UK and European headquarters for CSC Computer Sciences, Nokia and Sun Microsystems.

Cities across Europe have also enjoyed a rebirth.

In Cardiff, Wales, new life has been given to this once thriving coal export city at its Cardiff Bay. The redeveloped port now houses state-of-the-art office buildings, which house, among others, the offices of Welsh government and Britain’s Confederation of British Industry.

The HafenCity project in Hamburg, Germany, is regarded one of the most important developments in Europe. HafenCity covers an area of about 155 hectares.

Located between the historic warehouse district and the Elbe River, the project offers a mix of office, resident, retail, cultural and leisure uses. Overall, the projects increase the city’s central district by 40 percent.

Barcelona attracted 82 international investment projects, making it the second-most sought after destination after London, according to the “2003 European Investment Monitor” from Ernst & Young.

Barcelona itself has 3.9 million feet of office space coming in the Poblenou area, once an industrial heartland and now a new high-tech zone where people live, work and spend their leisure time.

“It’s a new concept in urban living where companies can get quality offices, and their employees can find quality of life, near beaches, green zones and work,” said Franisco Miron of Barcelona Department of Economic Promotion.

Companies such as T Systems and DiamonCluster Consulting have already bought into the area. Barcelona is a magnet for companies involved in pharmaceutical, automotive design, biomedical, shared services, finance, consulting, computing and media.

According to CB Richard Ellis, 68 percent of all office investment in Barcelona came from international investment funds last year, making it one of Europe’s best destinations for office investment, mainly because of the stability of its returns and yields.

Barcelona is the No. 4 city in Europe in terms of the availability of office space and No. 6 to locate a business, according to the “European Cities Monitor.”

Eastern Europe

The capital cities of Eastern Europe have been abuzz in construction activity. Jones Lang LaSalle (JLL), a leading real estate services and investment management firm, lists Budapest, Hungary, among the “shooting star cities” of the world, one of only five in Europe on its list.

“The supply of high-quality space remains comparatively low and the number of vacant properties is decreasing,” according to a JLL report.

In Prague, the Czech Republic, investors are primarily looking for logistics and commercial buildings, of which there reportedly comparatively few.

Poland’s capital of Warsaw has the largest and most expensive, but most turbulent of office markets in Eastern Europe. Distinct among the new EU entrants, Poland has other important regional centers apart from Warsaw.