Luxembourg office market: Blue skies ahead? (LU)
Thursday 16 December 2010
|Jones Lang LaSalle presents its view on the Luxembourg office market 2010 and the perspectives for 2011.|
|The corporate real estate market has benefited from an upswing in Europe in 2010. We are still quite far from the euphoria preceding the crisis, however, the key indicators on the rental market and real estate investment market have recovered, which suggests a stronger year in 2011. In Luxembourg as well, 2010 has ultimately been a good transition year. The various players in the real estate sector have held their ground and prepared for the future.|
According to Olivier Bastin: “Although vacancy rate rose above 7% in the last year, the fundamentals improved simultaneously. Investors, developers and occupiers ended the year with more projects than in December 2009 and activity will undoubtedly take advantage of this.”
Take-up reached 84,000 m² by mid-December and is expected to reach approximately 100,000 m² by the end of the year, depending on the closing of transactions currently under negotiation. In line with the 2009 figure, the take-up has been mainly driven by banking and finance as well as business services that together represent 55% of the total take-up. With the acquisition of a building of 10,000 m² on rue du Marché-aux-Herbes by the Luxembourg State for its own occupation (the largest transaction of the year so far), the public sector represents the third most important sector (14%).
Still impacted by the economic crisis of 2008-2009 and its consequences in terms of staff, the banking and finance sector went through a restructuring and merger & acquisition period and hasn’t yet return to its previous real estate activities level.
2010 saw various newcomers and expansions on the Luxembourg market. Some of the new occupiers, not yet present, are launching new activities in order to enter the market while others are expanding their local activities in Luxembourg. If not always translated into additional areas in the real estate market so far, this reflects the vitality of the business services sector.
Corporates are again taking real estate decisions after a status quo in 2008-2009. In the framework of cost cuts and management pressure, demand was driven by searching for cost efficient and sustainable real estate solutions. Upgrading quality and occupational efficiency together with increasing utilization and densities thus remained the main occupier focus for 2010.
The CBD has been the most active district so far, registering 39% of the total take-up, followed by the decentralized area (22%). Kirchberg and Station district registered respectively 16% and 10% of the activity.
The mean transaction size in 2010 has been pretty modest: 550 m²/transaction versus 925 m²/transaction for the five-year average, representing a 40% drop.
Amounting to 70,000 m² of which 85% was speculatively delivered (60,000 m²), the total completions for 2010 were concentrated during the first semester of 2010. Though this level is quite low compared to the five-year average (124,000 m²), its time concentration combined with second hand supply made vacancy rate reach its peak at 7.6% in Q3 2010, coming from 5.2% at the end of 2009.
The vacancy rate decreased slightly during Q4 2010 to 7.4% for the overall Luxembourg market with, however, different situations according to the district. Vacancy rates in the decentralized area and periphery, which increased sharply from 2009, started to stabilize reaching 14% and 20.7% respectively at mid December 2010. Vacancy rates in the station district, CBD and Kirchberg remain below 5%, with values respectively at only 1.8%, 3.4% and 3.7%.
Prime rents have remained stable over the year through all the Luxembourg districts with a level of €38/m²/month for the CBD.
In spite of its fragility, the economic recovery supported by a GDP growth of 3% for 2010 and 2011, leads us to expect a significant improvement in the corporates activities in 2011. The upturn launched in the business services sector during 2010 should continue in 2011 involving an increase in the real estate activity. As for the banking and finance sector, if talking about growth would be premature, it should nevertheless continue restructuring in 2011.
Future pipeline for 2011 and 2012 is low compared to the five-year average of 124,000 m² since it amounts to 91,000 m² for 2011 (of which 60,000 m² speculative) and 30,000 m² for 2012 (of which 4,000 m² speculative). The largest speculative projects foreseen to be delivered in 2011 include the Atrium Business Park Vitrum (16,200 m²) in Bertrange, decentralized area and the BHK building at Boulevard Kennedy in the Kirchberg (13,600 m²). The sole speculative project currently foreseen for 2012 is the WBC III in Windhof, Periphery (4,000 m²).
Considering the low pipeline level for 2011 and 2012 and the activity recovery, the vacancy rate is expected to decrease as of 2011 and could come back below 7%.
Prime rents should remain stable throughout 2011 but could be pushed upwards again as of 2012.
The real estate investment volume in Luxembourg by mid-December 2010 reached €0.25 billion, of which 90% alone during a very active fourth quarter. Our estimation for the full year is €0.30 billion which is nevertheless a third lower than the 2008-2009 levels. This relatively low level of investment during the first nine months reflected the lack of core investment available for sale.
The analysis by origin of investors/capital shows that the foreign investors are back on the Luxembourg investment market taking 60% of the total investment volume at mid December 2010. This share could even increase further by the end of the year. The domestic investors on the other hand decreased their share taking 40% of the total volume so far this year against 65% in 2009.
By nationality, Belgian investors took the lion’s share so far this year with 50% of the total volume followed by the German investors. The largest transaction so far this year is by the Belgian developer Codic which acquired the project Royale Hamilius located in the CBD from the Luxembourg City. This redevelopment project will include retail, offices, residential and a public and private parking.
Developers are seeking large positions to be ready when the market recovers. Private domestic and foreign investor remained active on the market seeking for opportunities. Insurance companies have not been able to close transaction during 2010. We have to note that three owner-occupier transactions were registered in Belval (Esch Sur Alzette) by Corporates for own occupation.
By type, the investment volume was dominated by the offices sector and mixed-use assets with 40% each followed by retail 13% and industrial 5%.
Prime yields remain stable in Luxembourg at 6.00% during 2010 unlike many European markets where yields already hardened. Small and medium-sized prime products might trade below this mark. Yield compression in major European markets could make Luxembourg more attractive and despite the emerging economic recovery, a few distressed assets could still appear on the market.
According to the expected improvement of real estate market fundaments during the course of 2011 and the decreasing risk aversion, we are expecting an increase in the investment volume next year.
• The capital allocation for real estate is expected to increase in 2011. Insurance companies for instance will have important equity to spend into real estate.
• Investment product will increase
- Some German open-ended funds could decide or be asked to sell
- Interest of investors in core+ products is increasing
- Developers will be active
• Banks are again willing to lend for large size tickets which is essential for the investment market.
Real Estate Brokers / Advisors