EUROPE - Munich has overtaken London and Paris as the best European city for real estate investment over the medium-term, according to LaSalle Investment Management.

Germany's third-largest city holds greater attractions for investors over the medium-term than any other European city, the fund manager's new study found, based on perceptions that it should be best placed to withstand the current economic turmoil.

LaSalle found that Munich had strong levels of wealth, a highly-diversified local business structure, consisting of a mix of strong global players and a growing small and medium enterprise sector from various industries, which protects the local economy from the full impact of the global financial crisis.

The study also concluded that Munich offered particularly favourable business conditions, which are complemented by extensive research and development activities.

Munich has become the first German city to top LaSalle's annual E-REGI ranking, replacing London in the number position.

Demand for real estate in London has fallen sharply over the last year, although its office market has seen the sharpest price reduction in Europe, LaSalle said.

While London's size and wealth have kept it in the index's top 10, weak GDP and employment growth expectations have weighed heavily against the UK capital's latest position.

"Notwithstanding its decline in the rankings, London remains a very attractive place for property investment, because yields have expanded well beyond fair value even allowing for the weak demand outlook," said Charles Maudsley, co-head of Europe at LaSalle.

"More caution should be exercised outside London and its hinterland. EREGI continues to highlight the wide variation in prospects for the UK's provincial centres and the capital. This disparity in economic strength needs to be reflected in deal underwriting."

LaSalle compiled E-REGI by ranking the top 98 European cities using a combination of economic growth factors, the overall level of wealth, and the relative attractiveness of the local business market.

There are significant changes to the top of the ranking in 2009 as a result of the financial and economic turmoil, to the benefit of wealthy cities and at the expense of locations whose ranking used to be driven by strong economic growth prospects.

"Investors need good local intelligence in this market - we have seen more change in 2009 among the top ten cities than in any year since the E-REGI index was launched," said Robin Goodchild, head of European research and strategy at LaSalle.

"Underlying wealth has been a big factor this year, with affluent locations such as the Swiss and Nordic cities, whose strong fundamentals help protects the economy from the effects of slower growth, doing well."

After a period of severe downwards revisions to GDP, property markets across Europe are probably approaching the bottom, according to LaSalle.

However, a recovery will be selective with larger, more liquid markets seeing a growing share of activity, particularly in the prime segment., claimed the real estate investment house.