The engine rooms of Europe have enjoyed a remarkable bounce back in transactional activity over the past year, so why are investors increasingly looking outside of these relatively safe havens towards the largely untested waters of Central and Eastern Europe?

First, even for those investors who would like to target assets in the more established markets of London and Paris, supply issues from a lacklustre development pipeline and an influx of foreign money chasing trophy assets has severely limited the choice of prime buildings. In addition, it is widely anticipated that there will be little further yield compression in these markets over the next three years, particularly the office and retail markets, with any growth being driven by rising rents alone.

But why CEE? Well, investment volumes within CEE markets have not been high relative to Western Europe, but they have remained constant through the global financial crisis. This can be attributed to a relevant combination of interesting consumer markets, a young population, maturing real estate markets and a moderate economic upswing coupled with a positive outlook. Compare that to the credentials of some of our Southern European neighbours and CEE countries suddenly start to seem a lot more attractive to investors, a divide that will only widen as Southern Europe recovers more slowly and struggles to reduce debt.

We have seen prime yield compression across most CEE markets in 2010, with Poland receiving sustained interest from investors and as a result, it is beginning to redefine itself as ‘developed’ Europe. Croatia is seen as interesting, alongside Turkey and Hungary, whilst Serbia is attracting industrial investors.

However, despite the broadening of horizons, investors will not compromise on quality; core product in a capital city remains the key message. Questions linger with regard to the size of local markets, a lack of tenant mix and ongoing political uncertainty: Nevertheless, promising macroeconomic fundamentals and increased market maturity should ensure that investor focus remains on this part of the world for the duration of 2011 and beyond.

This topic and much more is discussed in our 2011 Jones Lang LaSalle Pan-European Capital Markets Bulletin, launching at MIPIM next week.