London has slipped to second in Investment Managementβs annual European Regional Growth Index (E-REGI) following the countryβs Brexit vote in June.
The uncertainty surrounding the UKβs future trade relationship with the EU is dampening economic prospects in the country, the firm said β even though London and the rest of the South East remain strong in a European context thanks to a diverse economy and high human capital.
Manchester and Birmingham fell the most in the rankings, as the economic uncertainty created by a looming Brexit could hamper corporate-hiring decisions in these cities, it said.
The index ranks Europeβs Top 100 cities based on their medium-term growth potential.
Recent political events are beginning to affect the attractiveness of Europeβs major cities as investment destinations.
Post-EU-referendum growth revisions in the UK have led to Londonβs losing its top spot to Paris, a place it held for four consecutive years.
The French capital is gaining momentum, with the countryβs labour force more competitive and improved employment prospects.
The German cities of Munich, Berlin and Hamburg are also part of the 20 most-improved cities in the 2016 index.
LaSalle said the index included a component for human capital in a βknowledge-based economyβ.
The component includes skilled population, creativity, venture capital and research and development.
In the UK, the inclusion of this component has helped not only London but also Bristol, Edinburgh and Manchester to maintain strong positions.
Mahdi Mokrane, LaSalle Investment Managementβs European head of research and strategy, said the key drivers behind the index rankings this year were human capital and political decision-making.
βIn a knowledge-based economy, human capital, more than physical capital, plays a key role in creating economic value for investors and businesses alike,β he said.
βStrong human capital creates a virtuous circle, leading to greater productivity growth and stronger overall economic performance, which leads to higher rents and prices, which in turn creates greater human capital.β
Mokrane said political decisions β rather than just the macro economy β had changed the outlook for many cities this year.
βInvestors are questioning the economic future of markets where economic uncertainty prevails,β he said.
βOn the other hand, we are also seeing politicians do not always receive the credit for policy decisions that strengthen their economic base.β
