EUROPE - Prime real estate rents in Europe are to see a broad-based recovery from 2011, despite doubts over the economic outlook, according to ING Real Estate Investment Management.

Declining prime yields in major European property markets, driven by investors anticipating a future recovery in occupier markets, could be justified by a "genuine turnaround" next year, the fund manager said.

Eugene Philips, managing director of research and investment strategies at ING REIM Europe, said: "Prime rents have stabilised or have begun to recover for the best buildings in select markets, and a more widespread recovery is expected in the coming year.

"This apparently benign picture for prime space, however, masks the still present rent incentives and also low occupier demand for below-prime properties."

The European economic recovery has been boosted by exports, but Philips said this trend needed to be underpinned by domestic demand if it were to prove sustainable.

The report suggests the outlook is brighter for real estate markets in France, Germany, the Netherlands and northern Europe than for markets in southern Europe.

Will Rowson, chief investment officer at ING REIM Europe, said: "We are most positive on relatively stable retail investments in most regions of continental Europe, on prime offices in France and on high-quality industrial properties, particularly in France and Germany.

"Given their solid fundamentals, several residential markets could also be interesting for investors from a risk/return perspective."

The report also said that market conditions in prime retail locations in Europe were reaching equilibrium, although there was a clear divergence with secondary markets, where the outlook was far more uncertain.

France and Sweden were both highlighted as two of the retail markets offering the best absolute returns and risk-adjusted returns.

ING REIM is cautiously positive for the European logistics sector, based on prime transaction yields compressing faster than expected and conditions in the occupier markets showing signs of stabilisation.

The report suggests Hamburg and Paris are two of the best logistics markets for both absolute returns and risk-adjusted returns, although Stockholm topped its list for best absolute returns.

In the European office sector, ING REIM expects prime yield compression to continue during the next two years, with widespread but modest office rental increases forecast from 2012 due to muted economic growth.

The report said structural imbalances in some office markets could lead to increasing divergence between prime and secondary in coming years, making property stock selection very important.

Paris (La Defense and CBD) both topped ING REIM's list for best absolute returns and risk-adjusted returns for offices.