For most of Europe's property markets, the past year has been about as good as it gets. According to data from Jones Lang LaSalle, European offices earned average annual returns of 27 per cent in 2000, the highest since 1990 and almost four times the annual average rate of return over the past decade of 7 per cent.

When other property types are considered, the picture is also strong. According to consultants Healey & Baker, western European property markets are now in their third successive year of rental growth of over 5 per cent per annum and of 10 per cent annual growth in capital values. In the 12 months to last September, capital values rose by 12.1 per cent.

Jeppe de Boer, European real estate securities analyst at investment bank Goldman Sachs, points out that, for all the strong signals from the economy generally, property supply remains constrained. "Even now, it is very difficult for European institutions to raise debt finance for speculative development," he says.

As a result, the overbuilding that characterised the last property boom in the late 1980s simply has not materialised. Even a downturn in the European economy is unlikely to see a return to the vast swathes of empty buildings from the most recent recession.

In addition to finance constraints, Mr de Boer says, local zoning and planning issues are placing tough limits on development, particularly efforts to build out-of-town shopping centres. New centres in France and Germany find permissions almost impossible, while UK planners have set similar constraints.

John Rigg, head of investment at DTZ Euroinvest, says the parlous state of world equity markets is another factor spurring investment in European real estate. "There is an increasing feeling that global equities are not going to deliver and the appeal of real estate, with its defensive characteristics, is attractive," he says. `People are looking for more bond-type investments, and property offers rental growth besides," Mr Rigg adds.

A quick look at Europe's capital cities, he says, shows each one nearing record low vacancy rates, limited speculative building and rising demand. Moreover, economic growth for most of Europe, if slower, is still forecast at 2.0 to 3.0 per cent.

Meanwhile, strenuous efforts by countries such as Italy and Spain to comply with the requirements of joining the euro have produced strong economic growth and low underlying inflation, boosting demand for real estate of all types.

These factors are likely to be at the top of the agenda for more than 13,000 property professionals descending on Cannes next week for Europe's largest annual property conference, MIPIM.

Meanwhile, Europe remains what it has always been: a series of sub-markets, each of which has its own characteristics. Data from Healey & Baker show Europe to be a market of widely divergent opportunities, with offices in London, Brussels and Dublin at, or near, their cyclical peaks, while cities such as Dusseldorf, Moscow and Hamburg have further to rise.

Warehousing markets in Poland, Turkey and Hungary have just about reached their respective troughs, although in most of the remainder of western and central Europe rents and capital values are still growing.

Retail property in the UK has already passed its peak, according to Healey & Baker, while Hungarian and Polish retail markets are approaching their troughs.

Investors taking a view on Europe generally have a wide variety of property submarkets to choose from and the advent of the euro has reduced the currency risk for those investors operating within it and simplified the risks for investors outside it.

Adding to Europe's attractiveness, analysts say, are several emerging trends that threaten radically to alter the way European real estate is owned and occupied.

The first, and perhaps most significant, is the increasingly international nature of investment. Property, the ultimate local business, is now a truly international affair.

Analysts at Goldman Sachs calculated that, by the end of 2000, more than €25bn in equity and debt had been raised, mostly by US-based opportunity funds, for investment into Europe.

Roger Orf, chief executive at Pelham Partners, a US-based opportunity fund which has been investing in Europe since the mid-1990s, says that one big factor prompting a shift to Europe by US investors is the general sense that the peak has been passed in their home market. "In the US, it is no longer possible to get 20 per cent leveraged returns," he says, adding that for US investors in their home markets, "the hands of the clock are no longer at 12 p.m. It is now 1 p.m."

Meanwhile, he notes, the opportunity funds spearheading the rush into Europe have strategies requiring significant bank debt and European banks are still willing to lend heavily.

A second factor has been the trend to outsource government- and corporateowned property, increasing the size of the commercial real estate market generally.

Most recently, debt-laden British Telecom announced it was seeking a buyer for its property portfolio, estimated at £2bn. Its goals, it said, were better use of its balance sheet as well as its desire to extricate itself from the property business - an activity it did not believe a telecoms provider should engage in.

BT THUS joined a growing list of telecoms providers, including Enel of Italy, Deutsche Telekom of Germany and, most recently, SwissCom, which are under pressure from shareholders to improve returns on invested capital.

But telecoms providers are not alone. Banks, too, are looking to unlock the value in their real estate portfolios. A range of financial services providers from Abbey National in the UK to Ina, the Italian insurer now owned by Generali, have spun off, or sold off, their real estate portfolios.

Retailers are also spinning off their substantial property holdings. Carrefour, the French hypermarket chain, last year sold a group of its shopping malls to Klepierre, a French property developer, whose development skills far exceed those of the retailer. Metro, the German retail chain, has sold its real estate to a consortium backed by Westdeutsche Landesbank.

This, in turn, has placed large swathes of real estate into the commercial market. Indeed, Karl Smith, managing director at Russell Real Estate Advisors, a division of investment advisers Frank Russell Group, says the size of the European commercial real estate market is now equal that of the US. "We estimate the world commercial real estate market at $4,300bn," he says. "Of that, the US and Europe each account for 38 per cent."

Ominous storm clouds are gathering in the US, where the growing consensus says that the economy may not only be slowing but entering recession - casting a pall on the previously rosy prospects for European real estate.

However, it is in precisely these economic conditions, pundits say, that the defensive qualities of real estate prove themselves.