LONDON European real estate investors are so spooked by the region's sovereign debt crisis that a blinkered focus on the best neighborhoods of London, Paris and Berlin means they are missing dramatically better deals in far-flung locations.
While the most popular districts of Europe's financially strongest cities are the safest bet given the markets' resilience, elsewhere there is much more money to be made on high-yielding assets with stable tenants on long leases.
"You can't assume all property outside the best areas is junk," said Matthew Richardson, director of European real estate research at Fidelity Worldwide Investments, which has $400 million of European property under management.
Fidelity owns an office block in the British coastal town of Bournemouth, 100 miles from London, which is rented by a government tax office and produces a yield of 8.25 percent.
That compares with about 5.5 percent for the best office blocks in London's main financial district and sub-four percent yields for the luxury shops on highly sought-after Bond Street.
Property yields - the annual rent as a percentage of its overall value - are higher on so-called secondary assets because they are deemed riskier due to factors like location, lease length, the tenant's financial strength and the building's state of repair.
The same government which rents the building would only pay 1.7 percent on a 10-year bond. Granted, it could cut staff and offices but the tax office is one of the least likely to be cut and the lease contract ties them in for another eight years.
According to Richardson's calculations, the property could lose 52 percent of its underlying value and he would still make more money over eight years than if he put his money in government bonds.
The value of prime commercial property in the top European cities is about nine percent below its last peak in September 2007, property consultant CBRE said, while falls of more than 40 are common in many countries' regional areas.
Nicholas Judd, a partner at property advisor 90 North, is one of a few consultants pitching regional property to overseas investors.
This year he sold a Siemens gas turbine servicing site in Lincoln, 120 miles north of London, yielding about 7.5 percent on a 14-year lease, to Middle Eastern buyers.
"Siemens is pretty much seen as bullet-proof but you couldn't buy a Siemens corporate bond at that level," he said. A Siemens bond maturing in 2026 yields 3.5 percent, according to Thomson Reuters data.
Investors have started to wake up to the pure maths of returns and real estate funds have attracted more fresh money than other sectors this year, according to fund-tracker EPFR Global.
SAFE AS HOUSES
The desire for blue-chip security has focused so centrally that major investors like Malaysian pension funds and Qatar's sovereign wealth fund have snapped up trophy properties from the Champs Elysees in Paris to London's West End in recent years.
But just on the fringes of prime locations, property can yield as much as 100 basis points more, said Joe Valente, a managing director at JP Morgan Asset Management.
"As the saying goes, nobody ever got fired for buying IBM equipment and nobody will get fired for buying property in core locations," said Valente, who helps manage 7 billion euros of real estate in Europe.
The rush to safety is cheered on by brokers who encourage investors to focus on the best areas where deal values, volumes and broker fees are at their highest, said Michael Marx, chief executive of Development Securities.
"Agents have an appetite to be single-minded about market momentum. The research they are all putting out at the moment suggests the world is only going one way," he said.
The climate of fear has pushed the value of different classes of property "completely out of whack", Richardson said.
The difference between average prime yields of 5.78 percent and average secondary levels of 11.16 is about 538 basis points in Britain versus a pre-crash norm of about 100 basis points, he said.
Elsewhere in Europe there are bargains to be had.
In Dublin, companies like Google are looking for more space and, with a shortage of supply, prime yields could start to come down from around seven percent as property prices begin to rise again.
Even in Madrid and Milan, where property prices may fall further, the best shopping centers in the biggest cities have kept trading relatively well and command yields of 6.75 percent, said broker Savills.
Compared with trading bonds on an open market, buying and selling property can be a long and complex process that could deter some first-time investors, given the desire for liquidity in the current jittery climate, said Andrew Morris, managing director at wealth management advisor Signature.
For others its attributes as a physical asset may prove tempting. "With property you will always have the residual value of the bricks and mortar," Richardson said. "If a bond defaults, you'll just be left holding a piece of paper." ($1 = 0.6404 British pounds)
(Reporting by Tom Bill; Additional reporting by Sinead Cruise; Editing by Jane Barrett and David Cowell)