With approximately $285 billion of pension assets in European property, the impact of economic and monetary union (EMU) on the property sector is clearly an issue for the pensions industry. EMU will affect the way investors make decision, the flow of funds across Europe, the types of property investment vehicle, and property prices.

EMU will change how investors assess investment opportunities. A single currency and interest rate across "Euroland" means that domestic interest rates and exchange rate risk will no longer be key considerations - investors will increasingly judge deals on the basis of local prospects and property characteristics.

In the short term, at least, investors will still be influenced by individual country factors rather than looking at Euroland as an entity. National economic performance will continue to be a key ingredient in determining property performance, especially during the transition to the euro, and differences in national tax regimes, property market structures and market practices will remain important for investment decision making.

Market practice is hugely diverse across Europe, and a lot of change will be necessary to create a level playing field. However, change could come quickly, with EMU unleashing a swathe of convergence pressures. As far as property is concerned, I expect that landlords and occupiers will join in an unlikely alliance for market uniformity and common practice.

In terms of the flow of funds, EMU is expected to stimulate more cross-border property investment. The elimination of exchange-rate risk, combined with reduced transaction costs, will inevitably encourage property investors to widen their search across Euroland. This rise in cross-border property investment will be re-inforced by increasing crossborder activity within the broader business community, as banks, insurance companies and industrial conglomerates expand geographically. Also, the removal of current restrictions limiting cross-border investment by pension funds could have profound long-term implications for property investment flows across Europe.

To facilitate the increase in cross-border investment, a new breed of pan-European, indirect property vehicles is likely to emerge, rather than an increase in direct cross-border investment.

EMU is also expected to have a profound impact on both property rents and yields across Europe. However, a variety of forces operating in different directions make it very difficult predict the overall impact. For example:

The long-term economic stimulus that EMU should provide can be expected to increase occupier demand, serving to boost property values. Over the short term, an "EMU boost" to property values is likely to be focused on Euroland's peripheral markets, where lower euro interest rates could fuel economic growth and increase inflationary pressures on property.

If EMU creates a more competitive business environment, occupiers will strive to optimise their use of property. This could lead to downward pressure on property values, especially for secondary locations and stock.

A single euro interest rate and mobility of capital is likely to reduce differences in property yields between EMU countries. However, property yields will continue to diverge because of other factors such as city market prospects and property characteristics.

Lower inflation under EMU and faster rates of building obsolescence points to both lower nominal rental growth and positive yield gaps. In recent years, there has been a steady de-rating of property yields relative to bonds; although cyclical factors may temporarily reverse this trend, property yields are expected to remain above bond yields in the long run.

Greater market transparency and liquidity makes it likely that institutional funds will up-weight in property, which could result in downward pressure on yields for institutional grade property.

So, what will be the net effect of these competing forces on property values? I expect these forces to translate into increasing polarisation of market performance, with a premium attached to locations and properties which can provide competitive advantage for occupiers. EMU is expected to create a new economic geography in Europe, with city regions competing more to attract increasingly footloose activity. Some cities will be in a good position to gain, such as "Euro-centres" like Brussels, while other cities are likely to lose out. This will feed through to property prices, and there is likely to be a gradual re-rating of property rents and yields across Europe to reflect a new urban hierarchy.

EMU is also likely to encourage greater regional economic specialisation, leading to more diversity in local economic activity. Regional booms and slumps in economic performance will be reflected in property performance, and further accentuated by procyclical capital movements.

The Jones Lang Wootton property clock illustrates where each of the major European office markets are currently located within their rental cycle.

EMU might create even greater divergences in market cycles between Europe's cities, so that European property will continue to offer good diversification benefits.

Jeremy Kelly is a senior property analyst with Jones Lang Wootton in London.