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LONDON-Hot climates are not exactly a UK mainstay, but the sizzling business sector here has allowed its capital city to top the European Regional Economic Growth Index for the second year in a row. Published annually since 1998 by LaSalle Investment Management, the proprietary ranking of 91 continental municipalities in 27 countries aims to identify the best locales for commercial real estate.

Having emerged in recent years as Europe’s financial center, London excels in all three categories rated by E-REGI, easily outdistancing competitors in growth prospects while measuring high in wealth accretion and business environment. Munich is another big winner, moving up five spots from 2006 to second place. That spurt pushes a declining Paris and still-vibrant Dublin each down a spot. Stockholm retained the fifth position, reflecting another strong year throughout the Nordic region. Helsinki and Oslo, for example, both moved up in the top 10 to seventh and ninth, respectively. Luxembourg scored sixth, Stuttgart is eighth and Madrid earns the 10th place ranking.

“With market fundamentals positive and large volumes of capital still targeting European real estate, these cities can expect to take a large share of the transaction volume,” says Robin Goodchild, head of European research for LaSalle. Known primarily for its global financial strength, London was also credited for a diversified economy that now includes high-tech companies and impressive inroads into the life sciences arena, says E-REGI. The 2012 Olympics is another boost, says E-REGI, with London’s infrastructure being upgraded to meet the demand.

The tenor of this year’s E-REGI seems to be cautiously optimistic. Citing a European Commission survey putting corporate sentiment at its most ebullient since 2000, E-REGI says the economic upswing in the European Union that started in 2006 should linger through 2008. “Occupier demand is increasing in virtually every market and availability is being squeezed,” E-REGI reports, pushing rental growth ahead of expectations and encouraging construction of new space, albeit “at manageable levels.”

While developers may be exhibiting restraint, that has not been true on the European investment front, says E-REGI. There was a 9% increase in sales through mid-year versus 2006, reaching $170 billion. The same credit crisis dogging US property markets since August is infecting Europe in the late going of 2007, advises E-REGI, and could be enough to prevent a second straight year of record results. Banks are clearly becoming more cautious, reports Goodchild, “putting pressure on highly leveraged investors.” Fringe locations and questionable product could be in jeopardy, but E-REGI suggests some frustrated by yield compression might turn to riskier venues or tertiary markets to chase better returns.

The strong western Europe performance is being matched by impressive results in Central and Eastern Europe as well, says E-REGI, with Poland among the markets holding the most promise. On the bottom end of the scale, however, Italian cities were heavily represented, with Palermo rated the worst among the 91 cities. Naples and Genoa also garnered poor forecasts.

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