Risk aversion remains the dominant theme across European real estate markets, as highlighted in the LaSalle Investment Management mid-year 2012 Investment Strategy Annual (ISA) update.

The report shows that the divide between the most sought after leased properties in major markets, and nearly everything else, is wider than ever.

Risk aversion and flight to safety have risen to much higher levels with the price on core and super core real estate increasing over the last six months.

Yet pricing for edge-of-core and not-yet-core real estate have not moved much at all.

Following a period of relative calm at the start of the year, a new set of destabilising factors emerged as the growth versus austerity debate was played out in French and Greek elections. Continued political and economic uncertainty is expected into 2013.

An orderly Greek exit is still most likely but can be endured by the European real estate economy and property markets. A disorderly exit, or further deterioration in market confidence over Spain, would introduce risks that would be much harder to manage.

Downward pressure on yields has been driven by investor focus on core real estate.

The UK remains the most liquid market in Europe for stable, core properties attracting international safe haven investors.

The number of sellers is up in the first six months (from 2011) with increased trading in secondary assets and markets, most notably in the UK.

German open-ended funds have been impacted by weak inflows as investors react to new regulations. Two large funds were liquidated in May 2012. This has resulted in a raft of sales.

Investment volumes have witnessed sharp declines in Q1 2012 exacerbated by a sharp slowdown in France where the closing of the tax loophole at the end of 2011 brought forward purchases and reflected uncertainty around the outcome of the French election. Investment volumes are likely to lower than La Salle projected six months ago, perhaps down by as much 20 per cent compared to 2011.

Banks that are lending are only doing so in their domestic markets or in the UK, France and Germany and this is just for core assets.

Lending above EUR100m is limited to a handful of banks – the size of the debt funding gap is therefore undiminished.

Alistair Seaton, head of research and strategy at LaSalle Investment Management Europe, says: “The first six months of this year has proved to be a challenging period for real estate investors in Europe. The big question for international investors remains whether they should shun Europe altogether. We would argue not, as the marginalization of debt-dependent investors will continue to offer opportunities for those with equity.”