Real estate in major cities is outperforming country averages, according to MSCI.

The firm’s IPD Global Annual Property index found unlisted real estate at a city level outperformed countries, as well as continuing to offer a better return than bonds and equities or listed real estate.

Differences in investment behaviour depending on the type of city were identified by the index, MSCI said. Tech cities, it said, are among the world’s most volatile destinations for investors, while second-tier cities offer lower risk but lower returns.

Commodity cities, such as Johannesburg, Calgary, Perth and Houston, offer high annualised returns.

With UK cities improving last year, London is globally the closest city to peaking, MSCI said, with high annual and five-year returns. Manchester and most major US cities are also producing double-digit returns.

MSCI global head of real estate research, Peter Hobbs, said returns on assets in European cities, which the firm currently categorises as being closer to “sluggish”, could improve.

The fall in US and German government bond yields has made real estate attractive. “The biggest dilemma right now is whether investors will continue to get sucked into real estate with government bonds so low,” Hobbs said.

MSCI recorded a 9.9% return last year across all three traditional commercial real estate sectors and the residential sector. Industrial, at 13.6%, was the best performing sector, ahead of retail (10.1%).

Globally, the office sector returned 9.5% in 2014.

Hobbs said the sector last year benefitted from its higher yields, which attracted investors and consequently drove yields down.

As reported last week, European commercial real estate funds outperformed their US counterparts last year.

MSCI recorded strong growth in both the UK and continental Europe, with net returns of 13.7% from pan-European funds well ahead of their US counterparts, which recorded 11.7%. UK funds were the best performer in IPD’s index, with returns of 15.9%.