The vitality of the Spanish economy is reflected in the health of its real estate investment market. Over the first six months of this year transactions totalled almost €4bn, only €600m lower than in the whole of 2005 and almost €400m more than in 2004 (see table). Given the robust nature of the European real estate investment market this trend is not surprising.

Since 2000, European real estate investment has been characterised by an expansion in cross-border investment, with both mature and emerging markets being dominated by the inter-play of domestic and an increasingly diverse range of non-domestic capital.

In many cases non-domestic capital has been the driving force behind changes in investment pricing.

However, our data shows that, in Spain, domestic investors dominate real estate investment activity.

For example, of the 52 office deals completed in Madrid and Barcelona since the start of 2005 only 9 were undertaken by non-domestic investors.

This can be explained by the fact that many non-domestic investors find it difficult to make sense of current Spanish pricing. However, although Spanish investors are clearly aggressive, it does not follow that current pricing is excessive.

First, although there are clear risks (such as a potentially unstable residential market, high inflation, rising interest rates, etcetera) these are, in my opinion, more than offset by positive factors such as strong economic growth, relatively low rental levels, strong public finances, immigration and so on.

Second, the prices of some deals are distorted by the expectation of additional returns from redevelopment, particularly for residential.

Essentially, local investors are using their market knowledge, flexibility and willingness to undertake often difficult development schemes to out-manoeuvre more cautious non-domestic capital.

As a result, although there is still potential value to be found in the Spanish market successful investment can depend on a willingness to dig deep and think like a "local". Team up with a good local adviser or the odds will be stacked against you.

Tim Nalder, head of acquisitions, Invesco Real Estate, Madrid