UK - The prolonged crisis in the euro-zone is likely to lead to rental value declines and rising yields for secondary real estate in the UK, according to Knight Frank Investors.

Despite this, the property fund manager has identified an opportunity to generate "a near-double digit income return" in this part of the market, if volatility in the short term can be tolerated.

In a new report and Thursday morning presentation in London, Knight Frank Investors argued that one of the main impacts of the crisis on UK real estate would be the exacerbation of an already restrained lending market, particularly on secondary assets.

This is likely to lead to a fall in property valuations in the short term, but investors that can take a three to five-year view should be able to benefit from very attractive income returns.

Ian Whittock, head of strategy at Knight Frank Investors, said: "Secondary stock is already heavily discounted and the short to medium-term lack of competition that we expect in this part of the market offers the potential to pick up stock at historically inexpensive values."

Whittock, who joined the firm earlier this year along with fellow ING Real Estate Investment Management colleague Kevin Aitchison, added: "it is important to distinguish between short and long-term risk, and investors concerned with short-term valuation movements should probably resist investing in secondary properties since it is impossible to call the bottom of the market".

Aitchison, head of Knight Frank Investors, bemoaned that the UK property investment industry was wary of the danger posed by euro-zone crisis but so far produced little analysis on the direct repercussions of a Greek exit or failure of the euro.

Whittock said he was relatively optimistic that a euro-zone "catastrophe" would be avoided, because the consequences would be too severe for governments not to act. Such a scenario would have a widespread impact and would effectively mean "game over" for investors in all asset classes, he said.

In the meantime, the ongoing problems in Europe are likely to lead to a lowering of economic growth - Whittock said economists were already lowering their forecasts for 2013 - which will feed negatively into rental growth, with the City of London market vulnerable.

But secondary assets would suffer particularly, once hit with the added problem of lending scarcity. Whittock added: "the limited amount of available debt finance is likely to be an ongoing feature of the market and will present an attractive investment opportunity over the next year or so for those investors that are able to take a long-term view."