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Direct property investment in the CEE and Russia was squeezed by the global credit crunch in the first half of 2008, according to a new report released by DTZ on Tuesday.

In its latest Investment Market Overview, DTZ said that investment transaction volumes in the main CEE markets fell by 32% in the first half compared to a year before. A total of EUR 4.6 bn worth of properties deals was transacted during the first six months of the year, with German open-ended funds accounting for 39% of investment activity (up from 16% in 2007). Surprisingly, the share of larger deals of over EUR 100 mln increased slightly in H1, from 52% to 56%, with the bulk of these deals in Russia and Romania.

DTZ expects the increasingly uncertain outlook for financial markets and the world economy will weight 'heavily' on the CEE investment market next year. Property companies with significant development pipelines and highly geared debt structures are expected to be more vulnerable to the credit crunch and may be forced to cancel projects or generate cash through forced disposals.

While GDP growth remains buoyant across the region, with the exception of the Baltic States and Hungary, most economies are losing steam relative to 2007. DTZ said that the average annual GDP growth rate among the region's main markets in 2008-2009 is expected tor each 5.5%, still three times higher than in the eurozone.

The occupational markets, which in the UK and in the US were hit hard by the financial crisis, remain extraordinarily resilient across the region. Demand in all sectors of commercial real estate has been strong, rental levels have been rising particularly in Moscow, Kiev and Warsaw, and vacancy rates have been falling. Indeed the lower availability of credit is likely to curb development activity in many markets, a factor which could further underpin prime rents and put more emphasis on quality.

The deep uncertainty in the international financial markets has accentuated trends in the region's investment markets, DTZ research shows. Investors are giving a much stronger emphasis on property market fundamentals and are avoiding secondary assets warranting a higher risk premiums.

The property advisor expects the 'flight to quality' in the CEE investment markets to become more pronounced in H1 2008 and 2009 as the price correction in the region takes hold and the criteria underpinning stock selection focus on the prospects for sustainable rental growth and opportunities for active asset management.