A lack of supply and a rise in demand for space is expected to drive strong rental growth in key European markets, according to fund manager Invesco.
"We have got a market environment in some of the key cities where there is demand, but there is very little supply because of no development and that is causing rental growth," Invesco European direct property group head Simon Redman told Investor Weekly.
"There is no development pipeline at all; you are going to find it very difficult to develop.
"In some markets it is beginning, where some of the listed property companies have been able to raise finance, but in most of the markets where you really want to develop, like London and Paris, it takes a long time between raising the money to going through all the planning and zoning."
Invesco is forecasting rental growth of more than 30 per cent in London over the next five years.
"We're not expecting any real supply side in London, for example, till 2014. If you're investing in London today, you really want to be out at some point at or before 2014," Redman said.
Invesco is finding good opportunities in markets including London, Paris, Munich and retail assets in Northern Europe such as the Netherlands.
"Germany is not a very volatile market. If you are building a diversified portfolio you use Germany as a key source of not high, but good and very stable income," he said.
"The Netherlands and other Northern European markets are, from a retail perspective, ones which we continue to like and support. Northern Europe didn't really go into the same level of recession as Southern Europe.
"They are much better funded than the rest of Europe and compared to the UK and Southern Europe are under shopped.
"The other thing about investing in a lot of continental Europe is that the leases are indexed to the consumer price index and that's very helpful if you want to look at covering yourself up from an inflation perspective."
He said European direct property also presented a good opportunity for Australian superannuation funds because it provided a bigger investable universe and had lower correlation to the local property market.
