Luxembourg, 12 January 2010 – Just like the other European capitals, the Luxembourg office market was hit hard by the crisis in 2009. Nevertheless, and despite the importance of the vulnerable financial sector, the office market proved to be more resilient than most had feared at the end of 2008. Corporate office demand fell by “only” 22%, less than many other European markets and investment activity remained stable at a low level driven by domestic investors seeking opportunities in today’s market.

 

Olivier Bastin says: “Luxembourg will likely prove to be resilient. The vacancy rate at the beginning of the crisis was one of the lowest in Europe and although it increased to 5.3% and is expected to slightly increase further in 2010 it remains low in a European context.  We have not seen much office space offered for subletting by the financial sector as we initially thought. There are even newcomers on the market.
The market is autoregulated; new speculative products are going to be rare once the products currently under constructions have been delivered. Indeed developers are prudent and have difficulty to access finance. “

Letting market
Take-up reached 100,525 m² in 2009, 59% down on last year which was dominated by large transactions by the European Institutions and Luxembourg Administration. Nevertheless, when comparing it to the five year average, take-up is down 38% in volume.  The total number of letting and sales for own occupation transactions in 2009 (156 in total) decreased by 9% compared the five year average.

 

Another important nuance, is that when looking only at the corporate take-up and disregarding the take-up by the European or Luxembourg administrations, take up is only down 22% year-on-year again proving the resilience of the Luxembourg’ based companies. There are newcomers on the Luxembourg office market, predominantly holding companies, which take-up small space and could extend in the future.

It is clear however that in the current economic climate office demand by the corporate sector is generated from regroupment, restructuring and rationalisation rather than from growth expectations. Corporates have a close eye on their lease breaks and are optimising their housing expectations and controlling costs. By sector the business services and the banking and Finance sector both were responsible for 35% of all take up.

 

An analysis by district shows that the Decentralised Area recorded the largest take-up volume (32%) followed by the Periphery 27%. The CBD has a share of 19%, Kirchberg 15% and Station 7%. There were four deals above 5,000 m² recorded in 2009 of which three were acquisitions for own occupation. The two largest deals were recorded in the Periphery including the acquisition for own occupation of 9,400 m² by the NordLB and the letting of 6,200 m² by Lombard International both in the Airport Area. Banque de Luxembourg bought 5,966m² (Arsenal) for own occupation in the CBD and P&T bought  5,767m² (Bian) in the Decentralised Area.

 

There were also two large transactions closed at the Belval site located in the communes Esch/Alzette and Sanem; the south pole of Luxembourg. RBC Dexia / Dexia took 14,666m² in newly constructed buildings next to the 37,000 m² which RBC Dexia already occupy since 2006. Further the Commission des Loyers prelet the first building in the subdistrict Square Mile (9,057m²) to house ADEM and other public services. The office stock at Belval is currently 60,000 m² with a large development potential.
 
Completion level was high during 2009: 142,000 m² of new office space of which no less than 50% was unoccupied upon delivery. This, combined with the low demand, made the vacancy rate increase from 1.7% at Q4 08 to 5.3% in Q4 09 with an important difference among districts. The CBD, Station and Kirchberg have the lowest vacancy rate. It increased from +/-1% to a mere 3% over the year. In the Decentralised area and the Periphery on the other hand, vacancy now stands at respectively 7.8% and 15.1%.

Prime rents decreased during the course of 2009 from €40 m²/month to €38 m²/month. Increased competition among developers due to high vacancy could bring rents down further, although this will be much more the case in the decentralised and peripherical districts rather than the CBD districts.

 

 

		Q4 2008	Q4 2009
CBD	CBD	40	38
Kirchberg	Kirchberg	33,00	31,50
Station	Station	35,00	30,50
Decentralised South	Cloche d'Or - Howald	28	27,5
Decentralised West	Bertrange - Strassen	25	25
Decentralised East	Hamm - Neudorf	25	20
Periphery North East	Airport - Munsbach	26	24
Periphery South East	Contern	17	17
Periphery North East	Capellen - Windhof	22	21,5
Periphery South West	Leudelange	20	18,5
Esch	Belval & Centre	23	20

 

Outlook 2010
In comparison with the almost complete lack of activity at the end of 2008/beginning of 2009, the situation today is more positive. Although it is clear that 2010 will still prove to be a very difficult year, there is less uncertainty then a year ago and companies worldwide have a better view on what to expect. Consequently demand has been picking up throughout the year, and although it still takes a longer time than before the crisis, some companies are again ready to commit. This could result in a healthy take up figure in the first semester of 2010.

 

We forecast that the vacancy rate could reach 7.0% by the end of 2010 as another 83,000m² of office space will be brought to the market speculatively. The largest projects for 2010 are located outside the CBD including Vertigo in Cloche D’Or (24,000m²), Cubus in Howald (10,000m²), Atrium Business Park in Bertrange (11,450m²) in the Decentralised Area and West Side Village in Capellen (11,600m²) in the Periphery.  By district, vacancy rates are forecast to remain low in the CBD districts in 2010 whereas vacancy rates in the Decentralised districts could go as far as 15% and as far as 20% in the periphery.

 

During 2010 this downward pressure on rents could persist  as competition is expected to continue to increase. For the moment a lot of the available prime buildings are still under rental guarantee and it will only be when these expire, that some landlords could be ready to bring their rents down.

 

 

The real estate investment volume  in Luxembourg for 2009 (EUR 0.46 billion) maintained a same level as the year before but remains far below compared to the record years of 2006 (1.2 billion) and certainly of 2007 (EUR 2.6 billion).

In 2009 the share of own occupation deals was high; 30% of the total investment volume. Corporates took advantage of today’s climate or the opportunity to acquire real estate for entire of partly own occupation. This was the case for Bank of Luxembourg (Arsenal-CBD), NordLB (F7 Findel Golf – Airport) and P&T (Bian – Gasperich).

 

The analysis by origin of investors/capital shows a record volume of domestic investors (EUR 277 million) in 2009 taking 60% of the volume including Luxembourg government, Corporates (Bank of Luxembourg and P&T) for own occupation and private investors seeking the opportunity in today’s market. The second largest investor is Germany including NordLB and Commerzleasing taking 30% of the investment volumes.

 

The reason for the low volume is mainly the lack of core products. Owners of those products are not inclined to sell. Further, there is the lack of credit provided by the banks and the general shortage of liquidity. Banks avoid risk following the financial crises and the current economic crises.  Consequently debt driven investors are not active anymore in today’s market and others wait until the market is bottoming out. Institutional investors look mainly to buildings with long term leases (6 year or more). This means buildings with long term secured income, so less or no risk. Investment products which respond to these criteria are rare. In today’s market the sale of speculative projects with rental guarantee is impossible.

 

Across Europe, prime yields have been revised upward predominately in 2008. During the second half of 2009, yields remained fairly flat and even started to compress again in London. In Luxembourg, yields increased in 2008 by 45 basispoint and by another 20 basispoint during Q1 2009 but remained unchanged during the rest of the year at a level of 6.00-6.95%.

 

Outlook. For 2010, it is more likely that the investment volume will be higher than 2009. Buildings with long term leases will continue to be the most sought after investment products in 2010. We do not foresee important value corrections for buildings with at least six year leases. It remains important however to watch the letting market where rents remain under downward pressure.

The main active investors would be the German investors which watched first the markets that saw high price corrections (London and Paris) and are now also looking for opportunities in other European markets including Luxembourg. Domestic investors and Insurance companies will remain active on the market.

It is not excluded that banks will put buildings which they own for own occupation on the market through S&LB.   Until now there have been no forced sales but this could change in 2010 especially for building which were overfinanced and which face high vacancy.