Investment in commercial property recovered strongly in Europe in the first half of this year, amounting to 41.3 billion, 30 per cent higher than in the first six months of 2003, according to Jones Lang LaSalle.

In its European Capital Markets Bulletin, the company also identifies the key property themes for the short and medium terms which, it says, will include an improvement in the office sector which has under-performed the retail and distribution warehouse sectors in recent years and a greater emphasis on investments on the continent than in the UK because of changing interest rates.

The increase in Europe-wide investment in the first six months of the year was driven by low interest rates and good availability of debt. "Investor sentiment was boosted by improved economic conditions across Europe, although Germany remains the main exception," the Bulletin says. "We believe that the volume of investment in 2004 is on track to exceed 2003."

It notes that higher interest rates in the UK have resulted in a lower level of activity by debt-backed private investors and a strong return to the market by institutional investors. As a result, the UK's share of total investment in Europe was 54 per cent, far ahead of France's 11 per cent, which was the second largest investment destination.

The Bulletin comments: "Yield gaps continued to narrow in the UK, as property yields hardened and interest rates increased, and we began to see debt-driven private individuals and syndicates focusing more on continental European markets where borrowing rates remained unchanged.

Interest from Irish and Middle Eastern investors now stretches to central Europe. Another important trend was that UK institutions featured more strongly in the market: in Q2 2004, UK institutions made net acquisitions of around €1 billion, the highest level recorded since the end of 2000." In relation to the different sectors of the property market, the Bulletin says that the office sector's share of total investment increased from 44 per cent to 47 per cent in the first half of 2004, having declined since 2001.

"Investors were attracted by the prospect of a return to rental growth in 2006 and 2007," it says. Strong investor demand for retail across western and eastern Europe continued to outweigh the availability of assets. Investors have been flexible in sourcing retail opportunities around Europe and are now targeting central Europe and the Nordic region. Although the distribution warehouse market is characterised by high owner-occupation, competition remained strong amongst institutions and specialist funds for modern assets in key distribution locations such as France, Belgium, the Netherlands and central Europe.

Looking to the future, the Bulletin forecasts that the key themes will include an improvement in the office sector, driven by a cyclical recovery in occupier markets, better returns, and higher yields in non-prime assets.

"Recent downward pressure on real estate yields has reflected the low interest rate environment and strong weight of investor capital. Over the short-term we believe the prospects of any outward yield shift across Europe will be limited, with investor demand for all sectors remaining strong and interest rates still low, especially in the Eurozone.