Capital gains: Europe's major cities are a hunting ground for smart investors

Europe's capital cities are booming. People are abandoning the countryside to live where the jobs and the opportunities are plentiful, and in most countries that means the capital.

But British property investors seem fixated on the holiday areas. Their ideal spot is an old farm in Provence or Andalusia, often left derelict when the owners hightailed it to Paris or Madrid.

Holiday lettings are hard work, however, and money comes in only during the season, so many investors are looking at moving to the capital city, too.

A capital city will have an established lettings market, with a large pool of potential tenants who want to stay for long periods. For the arm's-length investor, they are a much better bet.

For Simon Tweddle, chief analyst at Property Secrets, the size of the market is key.

"Investing in cities is the only strategy – there are so many problems with holiday lets but in a capital there are one or two million people to potentially rent to, or people to buy your property when you sell up," he says.

Another factor is the availability of all the stuff that underpins modern life: such as airports, roads, phones, shops, restaurants and theatres. Pierre Williams of off-plan specialists Instant Access, advises: "It is very important to concentrate on areas with good infrastructure, and capital cities have this."

However, choosing the best capital to invest your capital in is not easy.

A good deal of international attention is focussing on Berlin, now almost rebuilt as the new capital of the reunited Germany. But analysts are unconvinced.

"The German economy is doing very well now but Berlin is a difficult one. Long term prospects are good but not those for the short term. Prices are fairly low but there is a reason for this – unemployment is high and the city was built for five million people but only three million actually live there," he says. "Finance is cumbersome and low loan-to-value, and tenancies are heavily regulated and subject to a lot of rules."

Prague is Tweddle's favourite capital, though he may be biased because he lives there. "Prague has matured quite a lot, with a healthy capital gain of 15 to 20 per cent last year, and it has a great finance market with the lowest base rates in Europe. Purchase costs are low too, at about one per cent," he says.

Robert Jenkin of Bulgarian Dreams is understandably keen on the Bulgarian capital, Sofia.

"Sofia has seen prices grow by 9 to 10 per cent over the last year, compared with 6 per cent for Bulgaria generally. It is the engine of growth in Bulgaria and, like London, it has its own economy," he says. " It still remains the cheapest capital city in Europe."

Bulgarian Dreams will soon launch The Belgravia, a new block in the university area, which is going up because of a new ring road. Flats are priced at ¿1,300 (£876) per sqm, so a one-bed flat will cost around ¿80,000.

Ross Mansoori-Dara of City Lofts is very keen on Paris, and has just launched a luxury block of flats in a grand house in Avenue Victor Hugo.

"Paris is undervalued, but it offers everything that London does – at a third of the price. Here, you get for £1,000/sq ft what would cost £3,000/sq ft in London," he says.

The one capital city recommended by several experts came as a surprise. It is the only divided capital in the world: Nicosia, Cyprus.The Cypriot economy is doing very well at the moment, and Nicosia is being rapidly redeveloped south of the green line. When agreement is finally reached, a reunited Nicosia will boom.

But another suggestion may be a step too far, except perhaps for investors with nerves of steel who are prepared to weather the ups and downs. Could the best long term investment hot spot in Europe be ... Tirana, capital of Albania?