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The sovereign debt crisis is polarising Europe's property markets, with the most attractive cities for future real estate investment being the competitive economies of the Nordics, Germany and Emerging European markets like Russia, according to Jones LaSalle's annual European Regional Economic Growth Index (E-REGI).

"The polarisation in Europe is the strongest since before the adoption of the single euro currency," says Simon Marrison, European CEO of LaSalle Investment Management. "The competitive economies of the Nordics, Germany and emerging eastern European markets are forecasted to fare relatively well over the next few years, while the highly-indebted southern European and certain emerging markets are likely to lag."

London has slipped to second place in 2011 due to a reversal of last year's gains in GDP and employment growth, as well as renewed global financial concerns, which have indirectly impacted the UK's capital. However, the city's wealth and business environment scores still far exceed those of Moscow, which leads the E-REGI rankings on the basis of its growth potential.

After climbing from 10th to 2nd place in last year's E-REGI, Moscow tops the table this year, demonstrating the importance of size and economic growth to a city's investment potential. Even so, LaSalle believes that a negative business environment score will continue to deter some foreign businesses and investors. "The crucial issue going forward is to restore confidence amongst foreign investors still wary of investing in Russia," argues LaSalle. "Moscow's growth potential and size makes it stand apart from the other cities, but potential growth by itself is not enough to earmark a city as a potential investment target market. All Russian cities received a negative business environment score primarily due to the lack of transparency and uncertainties around how foreign businesses can operate effectively."

Turkey, whose GDP growth reached an annual rate of 11.0% in the first quarter of this year driven by production capacity gains and its unrivalled consumption, sits alongside Russia as a sizeable emerging economy, which is reflected in Istanbul's surge from 25th to 5th place in the E-REGI rankings. The city is quickly establishing itself as a regional financial centre, whilst the rest of the country is also seeing the benefits of exceptionally high growth. "Istanbul performed very strongly, supported by the government's vision to turn the city into a regional financial hub. Large stable state banks are in the process of relocating their headquarters from Ankara to Istanbul, with the Central Bank and regulatory institutions expected to follow," LaSalle says.

In the second quarter, direct commercial real estate investment in Europe totalled €25bn, representing a 6% fall on the first quarter but 4% year-on-year growth. The increase in investment volumes in Turkey and Russia demonstrates that some investors seeking higher returns remain deterred by pricing of prime assets and are therefore looking into alternative markets with more growth potential in preference to weak, secondary markets in established economies.