LONDON-Recent European economic data show a strong picture that growth is coming from Chinese imports, inventory building, government spending, and purchases in anticipation of VAT hikes. Since some of this support will diminish in the next 15-18 months, real estate prices could be affected, says London-based property investment manager AEW Europe.

In its latest real estate report, AEW thus predicts a sluggish 2011 for the economy and commercial property. AEW believes risk aversion will spread further, and the gap between prices of prime and secondary assets will widen. Under the economic circumstances and increasing regulation, like Solvency II and Basel III, investors are already reluctant to take risks, so that long leases, strong tenants and good locations are in high demand. Core real estate is enjoying strong capital gains so that property is still good value.

Basel III, focusing on bank liquidity risk, counterparty risk and other issues, will have an indirect effect on real estate lending. Assets considered liquid in the past will now fill up the list of illiquid assets. Investors will need to seek financing for this type of property increasingly from the capital market directly, rather than from banks.