Luxembourg office market hit by crisis

Luxembourg saw take-up fall 71% in Q1 to 14,200 m² compared to the year-earlier period. This marks a fall of 60% compared to the Q1 five-year average, according to a new report by Savills.

Luxembourg’s low vacancy rate of 2.05% tcould rise to 4-5%, the adviser said, pointing to the decline in corporate expansion and 170,000 m² of new supply whch is set to hit the market this year, of which 70% remains speculative. But the projected vacancy figure is still low by European standards, the adviser added.

Lettings averaging 510 m² were concentrated in the corporate sector in Q1, with no activity at all recorded in the public sector. Although top quarterly rents dropped 12.5% year-on-year to EUR 326/m2, low supply and excessive demand over the past three years has created an imbalance, resulting in overall rents accelerating at a faster rate than most other European cities, the report added.

Luxembourg is host to over 152 predominately foreign banks, the largest fund industry and second biggest money market in Europe. The growth of office demand in recent years helped propel Luxembourg’s office market to record heights.

Sheelam Chadha, head of research at Savills Benelux, said: 'The government’s comprehensive stimulus package, and well positioned public finances, should help weather the impact of the recession. However, reality has sunk in across the property sector and with a record run in both leasing and investment markets over the past three years, we do anticipate a tough 2009 and 2010 for Luxembourg.'

No transactions at all took place in Q1 in the investment markets, Savills said. The report cites three reasons: a lack of product, which fits today’s criteria of long-let to tenants not linked to the financial sector; a lack of buyers, not helped by 80% of Luxembourg’s purchase base being reliant on German funds who are currently overexposed to this market or closed for business until H2 2009; a lack of deals incurring a difficultly in gauging market value. The report estimates current prime yields are currently around 6-6.5%.