GERMANY - High-street locations in Germany's secondary cities offer investors the lowest volatility in yields and rental growth, according to IVG's analysis of the retail sector.

In a recently published Market Tracker note, Thomas Beyerle, head of research at the €21.5bn property asset manager, indicated risk-averse investors could seize on the lack of volatility in class-B cities despite an overall shift in the retail sector.

Although retail had experienced a sustained investment boom since 2010, Beyerle pointed to a widening gap between rents and yields on prime high-street assets in first and second-tier cities - a trend he said mirrored investors' future expectations.

Rents have increased by 30% in prime cities and by 11% in secondary cities since 2000, according to IVG analysts. Rents in other German cities fell by 16% over the same period.

Beyerle said this week he expected stable yields on undersupplied prime assets in first and second-tier cities in 2012, with a slight improvement in high-street rents. Stable yields were also possible in tertiary cities with development potential, although he forecast potential yield decompression in other cities.

"The classic argument that retail real estate is particularly suitable for risk diversification is losing plausibility, not least because the polarisation between the demand for retail space, on the one hand, and rental growth, on the other hand, keeps intensifying - and dramatically so," said Beyerle.

Retail makes up Germany's largest real estate sector, accounting for 45% of the market, with a 40% increase in volumes to €10.8bn last year. Retail is also significantly more geographically diversified than office, with the 'big six' cities accounting for only 40% of total volumes.

But IVG found evidence of polarisation last year between shopping centres, which accounted for 45% of investment volumes last year, and the high street, which accounted for 28%.

The note pointed to strong demand for high-street premises in both prime and secondary retail cities. However, in contrast to first-tier cities, where demand for retail logistics remains strong, IVG found little interest in retail warehouse locations in secondary cities.