EUROPE - Returns from southern European real estate markets are set to lag behind those in northern Europe over the next five years, Invista Real Estate Investment Management has predicted.

In its latest research report, the fund manager forecast GPD growth in southern Europe to be very subdued over the next five years as countries struggle to reduce debt and reform their economies.

This will lead to real estate markets in the south underperforming those in the north, particularly in Germany and Scandinavia, the report said.

Invista believes the situation needs to be addressed by undertaking urgent reforms, and it said the European Commission's Europe 2020 programme of economic reforms could have a positive long-term impact on the real estate sectors in some of Europe's less competitive economies.

Europe 2020 includes a number of initiatives, including those aiming to boost employment and research and development investment, and reduce greenhouse emissions and energy use.

In the short term, however, fiscal consolidation, correcting macroeconomic imbalances and ensuring financial sector stability, are set to remain the priorities, Invista said.

Real estate valuation movements are already starting to reflect a north-south divide. Data from CBRE shows that in 2010 valuations in Germany and CEE stabilised, while those in France and the Nordics began to increase.

In contrast, valuations in countries such as Spain, Italy, Portugal and Ireland remained under downward pressure throughout 2010 and are, on average, approximately 25% lower than their 2007 peak levels.

Tim Francis, director, continental European strategy and research at Invista, said: "2010 was a positive year in which Europe's economic recovery gained momentum and its property market stabilised following sharp declines in capital values.

"However, with a diverging economy, the problems on Europe's periphery are indicative of larger issues which are reflected in the region's slowing economic growth rate and lack of competitiveness."