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Paris and Madrid are expected to reach fair value by the end of this year, according to DTZ's Money into Property Europe report. While 2009 will continue to see no near-term end to market misery in property markets across the region, broad value will gradually return to Continental Europe over the next 12 months, the report added.

The difficult lending conditions combined with a wait-and-see posture of buyers and vendors brought investment volume down to EUR 10 bn in Q1 2009, the lowest level since DTZ started tracking this series.

The DTZ report shows that the fall in transaction volumes was accompanied by a reversal of the growth trend in cross-border capital flows. Overall cross-border flows fell by 59% from EUR 119 bn in 2007 to EUR 49 bn in 2008.

The decline has been most pronounced in inflows to Europe from other regions, falling by 76%. Europe reached a neutral position in terms of capital flows, with inflows from other regions about the same size of outflows to other regions. By comparison, it was a net funds importer in 2007, when inflows from other regions exceeded outflows to the tune of some EUR 25 bn.

At a country level, the decline in share of foreign investors of the investment market was most pronounced in Germany and France, where in 2008 foreign investors represented less than 50% of total volumes. Foreign investors actually increased their share in Spain and Italy and continued to represent about 90% of investment activity in CEE.

Magali Marton, head of CEME Research at DTZ, comments: 'Looking forward, we see no near term end to the market’s misery. Lender sentiment remains bearish with expectations for reduced net lending in 2009 and further tightening of lending conditions throughout 2010. Investor sentiment is similarly bearish, expecting transaction volumes to decline further in 2009.'