The Greek crisis has been not about Greece, but Germany. Faced with a ‘pale, anaemic and drawn out' euro-zone recovery, investors will head to Poland. Shayla Walmsley reports

Charles Dumas of Lombard Street Research, the economics consultancy, claims that the Greek crisis has been not about Greece, but Germany. Will the cost to Germany of the Greek bailout - and its future euro-zone membership - be politically sustainable? Germany's position is precarious. As Dumas points out, export-driven growth has been a pyrrhic victory because German incomes have been suppressed and "southern European consumers, to buy these new exports, have had to stuff themselves up to the gills with debt. Now they've had to cut back on their borrowing, it means they can't afford those exports anymore."

If Germany were to leave the euro-zone, it would still be reliant on exports, having failed to drive up domestic consumer demand. The German electorate might be impatient with the European dream, but they are still incorrigible savers.

Even apart from Med debt, Germany is not the only European economy that investors need to worry about. According to Joe Valente, head of investment strategy at insurer Allianz, the euro-zone recovery will be "pale, anaemic and drawn out", with the severity of the downturn meaning that it will take up to six years before the major European economies are back to where they were in 2008 - if there are no further shocks. Meanwhile, higher unemployment and higher taxation will result in lower-than-expected growth and higher-than-expected uncertainty.

"The lack of robust economic growth will mean the leasing market will continue to see, at best, a modest recovery in demand and hence rental growth," says Valente. "This will mean that much of the recent yield compression and capital appreciation may well lose momentum."

According to Sabina Kalyan, senior director and head of European research at CBRE Investors, last year's trend towards domestic retrenchment has given way this year to cautious cross-border investment. Just as bond yields began to widen last year, the same thing will happen in real estate in 2010. "Investors are comfortable in France and Germany but they're nervous about investing elsewhere in the euro-zone so they will demand higher yields," she says.

Joseph Stecher, chief investment officer of Morgan Stanley Alternative Investment Partners, says it is still too early to tell how the group will invest in Europe. In a neutral weighting, Europe would account for 40%, but whether the firm will be neutral, overweight or underweight in Europe depends on its forecasts for growth, distress and competition.

On forecast growth, it would underweight Europe. On distress, as measured by bank debt, "there are likely, at least in theory, to be a lot of distressed sellers, which argues for overweighting Europe". Finally, in the US "there are more people doing what I do. On that basis, I'd be going where the competition isn't, which argues for overweighting Europe."

With no rush to make investments, Stecher is likely to tap the brakes on Europe this year and maybe next, but to leave open the opportunity to get back to neutral during the course of the investment period.

"The big advantage the US and Asia have is their projected growth," he says, pointing to euro-zone growth of 1%, compared with 2-3% in the US over the next few years, and nearer 10% in Asia. "If the euro-zone forecast turned out to be overly pessimistic, or the forecast growth in the US and Asia turned out to be overly optimistic, we would take a second look," he says.

In the meantime, a mooted consequence of the euro's current problems would be investors switching from euro-zone markets to non-euro-zone ones with formerly similar risk profiles - say, from Finland to Sweden.

Yet investors with Finnish holdings appear relatively unfazed by a problem that can be fixed, as they see it, with the simple currency hedge. SPP Livförsäkring, a pensions provider represented by Norwegian insurer Storebrand, in March invested in a Nordic logistics fund with significant Finnish exposure.

Tomas Svensson, chief investment officer of Storebrand Eiendom, the Norwegian firm's property arm, says: "If we were to invest in logistics facilities in Spain or Germany, or in a non-euro-zone country such as Norway, the currency wouldn't have anything to do with it. We would be looking at the growth prospects of the market and at the fundamentals of the real estate market. The currency would not worry me."

Schroders property director Ubbe Strihagen likewise points out that his funds hedge currency to some extent by using local debt, "but fundamentals and the underlying property market are our focus, rather than the currency".

Not that investors are chasing currency risk, either. The alternative to hedging is to invest only in your home market, but if you want property exposure abroad you hedge, unless you want currency exposure as well, says Svensson. "The reason for pension funds investing in property is obviously because they want property exposure, not currency exposure."

All crises have their beneficiaries, and the euro-zone crisis is no exception. In this case, it is Poland, whose free-floating local currency offers an automatic stabiliser, according to Barings EMEA equity investment manager Mattias Siller. In a situation where the economic outlook deteriorated, the currency would sell off, imports would contract "and the economy would attract FDI inflows and export its way out of the misery".

Kalyan agrees that Poland has already benefited from euro-zone turmoil. Until the Greek crisis, there was keen pricing in core Europe, then higher risk markets in Central and Eastern Europe. After Greece, investors are looking at these markets on a case-by-case basis.

Peripheral euro-zone markets will continue to suffer, as will secondary locations in mature European markets (such as rural Belgium). But what matters here is that the old split between euro-zone markets as stable and mature, and CEE markets as riskier and potentially unstable, no longer applies.

"Before the Greek crisis, investors didn't want to invest in CEE; they wanted to invest in stable, mature European markets," says Kalyan.

"Now, the question is, would you invest in Poland or Portugal?"