EUROPE - Despite market saturation in the UK and declining yields elsewhere in Europe, "the wall of money" surrounding real estate is showing few signs of collapse, claimed a report published last week by UK property firm Knight Frank.

According to the report, investors are still looking to Europe for investment opportunities - but declining yields in prime had driven them towards secondary and niche assets.

The report cited German funds which, faced with limited investment opportunities in their domestic market, are looking for returns outside it - notably in Austria and Switzerland, previously dominated by domestic investors.

Liquid German funds are also looking to neighbouring Poland and other Central and Eastern European (CEE) markets because they offer "slightly better values and higher yields", said Knight Frank research analyst Matthew Colbourne.

"Value is increasingly hard to find in key markets such as London and Paris. Investors are getting a bit more adventurous, finding value in smaller markets and in unusual asset classes," he added.

Record investment had driven prime office yields in London, Paris, Dublin and Madrid below 4%.

Higher interest rates - the European Central Bank (ECB) recently raised the Eurozone interest rate to 4%, the Bank of England to 5.75% - would likely deal a blow to leveraged investors. However, Colbourne said investment trends focused on smaller markets and segments would continue.

"Despite the rising cost of borrowing and lower yields, people are still interested in markets across Europe," he said. "We might be reaching the top of the market but the data are still positive."

Sector-wise, declining vacancy rates and an upward rental trend underpinned office, especially in markets characterised by high business confidence, such as Dublin and Madrid, or prime office shortage, as seen in London and Moscow.

Meanwhile, strong consumer confidence boosted European retail markets. Even in Germany, which in January saw a 3% increase in value-added tax, negative consumer reaction would be short-lived. Related logistics in Central and Eastern European markets would continue to "evolve dynamically", said the report.

In a separate section on secondary markets, Knight Frank identified a group of investors who had effectively abandoned prime for cheaper secondary locations with rental growth prospects. With 6% yields in Lyon compared with 4% in Paris, the report cited especially French regional markets and Polish second cities, including Krakow.

However, a smaller pool of potential tenants offset higher initial yields in secondary markets.

"Occupiers may be less keen to move in - which means that investors may be more likely to look at pre-let acquisitions," said Colbourne.

In addition, secondary markets offered less potential for rental growth - although they were also slower to pick up on downward rental trends.