EUROPE - Investors in the European office market have become so risk averse that returns in markets most exposed to the sovereign debt crisis are now 25% above those in the least exposed sectors.
With returns having been driven by pricing, the report from real estate services firm DTZ found that the most exposed markets now had annualised total returns of 8.4%, marginally exposed markets had 7.8% and the least exposed had 6.7%.
Tony McGough, global head of DTZ Forecasting & Strategy Research, said: "The impact of austerity measures on property investment markets across Europe has been one of polarisation.
"Property yields have remained high in peripheral economies, while driving them down in core locations."
The report showed that austerity measures across Europe were leading to severe public sector job cuts in many markets, and this is acting as a drag on rents.
Office rental growth is forecast to be extremely subdued over the next five years, and total returns will be driven by income, according to the report.
The DTZ splits European countries into categories, using three criteria: national debt as a proportion of GDP; GDP growth; and the percentage of public sector job cuts as a proportion of total office employment.
Greece, Ireland, Italy and Portugal are categorised as the 'most exposed', five countries including Germany and the UK are classed as 'marginally exposed', while most of those economies classed as 'least exposed' are outside the euro and include the Nordics and CEE nations.
McGough said: "Capital has shifted rapidly from countries most identified at risk and even to less exposed cities within countries."
The difference in performance between the three categories was mainly driven by yield spreads, DTZ said, with the most exposed markets now offering yields about 100 basis points above those of the least exposed markets.
Matthew Hall, associate director of DTZ Forecasting & Strategy Research and the author of the report, said it was notable that most countries - a total of 17 - remained largely directly unaffected by the crisis.
Nordic countries and those within the CEE were still best equipped to deal with the government debt trouble, he said.
The report also showed that, within each country, there were varying levels of exposure to the crisis.
Second-tier regions and cities were generally the most exposed through high proportions of public sector employment. Some regions were shown to be dominated by public administration, particularly in the CEE and peripheral markets.
McGough said the impact on rents was still playing out.
"Austerity cuts throughout Europe have been announced, but few have actually taken place, so the full impact will be revealed over the course of the next couple of years," he said.