EUROPE - Prime real estate in Europe still offers attractive income return prospects, despite a lack of clear outperformance in many markets, according to DTZ.
Of 91 markets covered by the firm's Fair Value Index, 52 were rated 'warm', according to criteria including pricing relative to government bond yields.
Of those, 17 prime UK and 10 German markets offered a substantial yield premium.
The report expected a medium-term upward shift in yields for London and Paris as a result of investors moving away from so-called safe havens towards currently distressed markets as economic conditions normalise.
Only nine European markets warranted a 'hot' rating because of low capital growth expectations.
Yet the report identified significant growth potential in markets such as warm Dublin - although it comes with economic risk - as a result of the Irish government reversing its position on retrospective upward-only rent-review lease clauses.
The report said: "The plan had been clouding the investment market, and clarity will provide a much-needed boost."
Although rents in the Irish capital will remain flat in 2012, the report's authors claim the market is poised for a stronger medium-term recovery, with Dublin office likely to see the highest average rental growth (5.1%) in Europe over the next five years.
Downgrades in this year's report include Belgian retail because of a higher risk premium based on exposure to the euro-zone crisis, and Budapest because of its reliance on euro-zone bank lending.
However, the impact of a euro-zone break-up would be relatively short-lived, according to DTZ's break-up scenario.
A pan-European recession - with the possible exceptions of Poland, Romania, Russia and Turkey - would result in rental declines across all market sectors, including 22% for Paris central business district (CBD) office to the end of 2013 and 13% for the City of London by the end of 2012.
"In the near term, the scenario results in significant capital value erosion as recession and a credit squeeze push property yields higher," the report said, adding that, in the medium term, loose fiscal policy would keep bond yields low.
As a result, by 2016, there will be little difference in property yields under the base case and break-up scenario, DTZ said.