By Miriam Beul-Ramacher

Medium-sized cities have emerged as strong economic performers and are among the top picks for international real estate investors, according to European property experts who gathered at ULI Germany’s Urban Leader Summit, held July 1 in Frankfurt am Main.

Secondary markets like Wolfsburg, Germany, and Lyon, France, present exciting investment alternatives to investors, who are looking for high returns. Nonresident and foreign investors can profit from the low prices in secondary cities as long as they bring a certain risk tolerance, form partnerships with local players, and are prepared to invest smaller sums.

Known for their high quality of life and their elite academic institutions, several mid- and small-sized European cities are attracting workers and their families, who are seeking greater affordability and an easier pace of life than can be found in London, Paris, or Berlin. “Not everyone wants to live in a big city,” explained former German President Christian Wulff, senior adviser at Corestate AG, a Swiss real estate firm.

Because purchase prices for real estate in the large cities have become too high, more and more investors are looking for alternatives in the provinces. According to Corestate founder Ralph Winter, Germany boasts 600 cities with 20,000 to 100,000 residents, many of whom are solidly within the middle class. “You won’t find that anywhere else in the world,” Winter said.

Secondary European cities are generally not well understood by foreign and nonlocal investors. Several panelists recommended that foreign investors would benefit from forming strategic partnerships with local asset managers to improve their understanding of secondary cities.

Certain medium-sized cities in Europe have the reputation of being one-company towns, which rely heavily on a single industry or corporation. Wolfsburg, home to Volkswagen AG, has been subject to this criticism, which the town’s mayor, Klaus Mohrs, was quick to dismiss: “ ‘If Volkswagen coughs, Wolfsburg immediately has a lung infection,’ was what people always said before,” Mohrs said. “That is no longer the case today.”

Due to economic diversification, the 124,000-resident city is, in fact, booming and has become one of the highest-performing small cities in Germany. Between 2010 and 2014 alone, Wolfsburg welcomed 3,244 new residents—an increase of 2.7 percent. In just the past 15 years, 40,000 new jobs have been created primarily in the areas of research and development.

Yet, like other small and midsized cities, Wolfsburg suffers from a housing shortage. The city’s new master plan calls for the construction of 6,000 homes—spread across 60 individual projects—over the next five years. Based on this plan, Wolfsburg could be further developed as a prime residential location with the ultimate goal of adding 12,000 new residents. Along with homes and rental units, new infrastructure would have to be built to support future growth.

Facing a similar task is the British city of Birmingham. With 1.1 million residents, it is the second-largest city in the United Kingdom. The economy is humming and the number of residents has grown steadily since 2002.

“By 2030, Birmingham will have around 150,000 more residents than today,” reported Waheed Nazir, the city’s director of planning and regeneration. The former center of British metal processing has transformed itself into a service-based economy. Abandoned production sites have been torn down or recycled, and new apartment buildings, schools, and child care centers have gone up.

As the most important infrastructure project in the future, high-speed rail will connect Birmingham with London in 50 minutes, Nazir said.

The economy of the Lyon region in southern France also is developing positively in relation to the French economy as a whole, which is in a slump. Lyon’s real estate market, second only to Paris’s, is trending upward, with an expansion of office and commercial space.  Over the past decade, the inventory of office space in the region has increased by 35 percent with a vacancy rate of just 4 percent. In 2014 alone, investors poured €874 million (US$979 million) into Lyon’s commercial sector.

“We are known for our hospitality and have been distinguished as the most business-friendly city in France,” said Hajo Bakker, chief of business location services in Lyon.

The 550,000-resident Polish city of Posen also is known as a hidden gem, primarily due to its strategic location between Berlin and Warsaw. The city enjoys a 3.2 percent unemployment rate and a high percentage of young, educated workers. One-fourth of the region’s roughly 1 million residents are between the ages of 24 and 30, and roughly 120,000 students are enrolled in the local colleges and universities.

Posen is experiencing the side effects of its success. Residents and companies have fled the city center in search of cheaper rents. At €12.50 to €15 per square meter (US$1.30 to US$1.57 per sq ft), office space downtown is now at a premium. One of the goals of the city now is to bring back those who left it for the surrounding region, according to Marcin Przylebski, the city’s head of investor relations.

Read the German version of this story.

Miriam Beul-Ramacher is a freelance journalist. Translation services provided by Alboum & Associates.