Whether you're on the hunt for a vacation property as travel reopens, or you want a store for your cash as stocks somersault, Europe can offer a host of compelling second-home destinations.From access to fine food and rich culture to stunning scenery, the continent has something for everyone — and property purchasers are buying in.In the past year, Europe's prime real estate market has grown 5.6% amid continued demand, according to new research from international real estate agency Knight Frank. Meanwhile, rental returns in the region's most in-demand vacation destinations continue to rise."For second homeowners, Europe's cities offer culture, connectivity and a good quality of life, whilst for investors they offer strong tenant occupancy and relatively low purchase costs," Kate Everett-Allen, head of international residential research at Knight Frank, told CNBC.The growth comes as investors search for safe-haven assets and income-generating investments as inflation soars — with interest extending across the Atlantic.Yet, as with any investment, purchasing a property is a big financial commitment, and knowing where to start can be tricky. Using data from Knight Frank, here's CNBC's rundown of the best places to start looking for a second property in Europe.Top cities for property price growthIf you're in the market for capital growth, consider casting your eye to the ever-alluring cities of Western Europe.Price growth in Europe's prime real estate markets — categorized as the top 5% of the market in value terms — has been among the highest in the world in the past year, according to Knight Frank.Berlin, Germany has seen the strongest price growth in the year to June 2022, with high-end properties appreciating 12.6% on average.Berlin property prices have appreciated at the fastest click across Europe's prime real estate market, according to Knight Frank.Nikada | Istock | Getty ImagesThe annual uptick puts the German capital's growth rate well ahead that of other global cities like New York (7.3%), Hong Kong (3.1%) and London (2.5%).Elsewhere, property price appreciation has been strong this year across the high-end real estate markets of Edinburgh (11.2%), Dublin (10.2%), Zurich (10.2%) and Paris (8.9%).The slowdown will be felt most in lower price brackets and domestic-driven markets.The continued rise of the region's top cities comes as growth rates slow across the global property market amid rising interest rates and a darkening economic outlook. However, Knight Frank said the slowdown has not yet translated to property prices — with the luxury sector proving particularly resilient."Rising mortgage rates and a weakening global economic outlook are cooling some of the ebullience of the last two years, but the slowdown will be felt most in lower price brackets and domestic-driven markets," the report noted.Making an overseas property purchase is not without its challenges, however. Before embarking on an overseas purchase, prospective buyers should consider foreign exchange rates, local mortgages and taxes, ownership and sales costs, as well as any restrictions on foreign owners.Best locations for rental returnsIf you're looking for a buy-to-let property, Europe's prime vacation destinations may just fit the bill, with the Mediterranean coast an eternal favorite for holidaymakers.On top of the above considerations, there are a few other factors to consider when purchasing a rental holiday home. Those include location — both in terms of proximity to local amenities and accessibility to international airports — year-round demand to minimize void periods, and market liquidity.Italy's Tuscany and Liguria regions, France's south coast and French Alps, and Spain's Barcelona, Marbella and Balearic Islands are among some of the top locations in Europe to invest in a buy-to-let property based on those criteria, according to Knight Frank.Tuscany, Italy, home to rolling hills, glorious food and one of the world's greatest collections of Rennaissance art, is a perennial favorite for overseas property buyers.Slawomir Olzacki | Eyeem | Getty ImagesTuscany alone recorded a 30% year-on-year increase in enquiries in 2021, with the region accounting for two-thirds of all property searches within Italy.The Tuscan city of Lucca on the Serchio River is a particularly popular choice, representing a quarter of buyer requests in 2021 alongside Pisa and Bolgheri, and recording annual price growth of 6%, according to Knight Frank.The average property price sought by Knight Frank buyers in Lucca and Pisa now stands at around 1.7 million euros ($1.8 million) — well below the Tuscany region's 3.7 million euro average. Meantime, average daily rental rates stand at 471 euros. Buyer competition heats upA strengthening dollar and weaker euro is heating up Europe's property market, with the continent becoming an increasingly appealing destination not only for U.S. holidaymakers but also American real estate investors.The euro is currently trading at close to parity with the dollar, meaning U.S. buyers are enjoying a 15-20% discount on property prices in any of the 19 euro zone member countries compared to July 2021.And it shows. In the first five months of 2022, Knight Frank recorded a 37% increase in searches by U.S.-based buyers for French properties. Now, their search pool is expanding across the continent.We're now seeing U.S. buyers target traditional sunbelt areas, which is a departure from the norm.Mark Harveyhead of international, Knight Frank"In the past, U.S. interest has been focused on cities offering culture and connectivity from Rome to Paris and from Barcelona to Florence," Mark Harvey, Knight Frank's head of international, said."But we're now seeing U.S. buyers target traditional sunbelt areas, which is a departure from the norm," he continued, citing growing interest in destinations such as Mallorca, Sardinia and the South of France.With the U.S. Federal Reserve tightening monetary policy at a faster clip than the European Central Bank, that dollar rally could be set to continue, making Europe a competitive investment destination for some time to come."Further rate hikes by the Federal Reserve will see the dollar strengthen further against the euro leading to potentially greater discounts for U.S. buyers," Everett-Allen added.
From luxury city escapes to vacation rentals: These are Europe's best destinations to buy a second home.