The office market at a new record in 2015
The office take-up market (rental and acquisition for own occupation) finished 2015 on a new record, with over 335,000 m² of take-up recorded throughout the year. This represents growth of more than 65% compared to 2014 which was itself a good year for the office market.
Several elements explain this exceptional year on the take-up market:
1.The University development at Esch-Belval: The University is expanding at Esch, taking up more than 100,000 m² in 2015 and bringing with it the development of this zone in the south west of Luxembourg through the arrival of many students, the gradual arrival of companies with or without a link to the University, the creation of student lodgings, the gradual occupation of the existing shops… This zone is set to grow further over the coming years.
2.Substantial dynamism from the European institutions: these accounted for some 15% of take-up this year, against less than 5% three years ago. In 2015, The European Investment Bank and the European Commission took up over 60,000 m² of office space on the Kirchberg plateau (IAK and President buildings), and at the Cloche d’Or (Laccolith and Ariane building (buildings). Cushman & Wakefield acted in two of these four letting mandates.
3.The delivery of new headquarters buildings: for example, Arendt & Medernach (15,000m²) and Ernst & Young (around 30,000m²) at the Kirchberg and 14,000m² for the CSSF along the route d’Arlon in Luxembourg.
In general terms, Kirchberg and the Periphery between them account for more than 60% of take-up in 2015. The reasons for this concentration are different, nevertheless, from one district to another. The quality of the buildings, the arrival of the tram and the mix of functions, are all advantages helping the dynamism of Kirchberg, for example, while a few specific transactions by the University (100,000 m² of take-up) explain the success of the Periphery in 2015.
As a result of this unprecedented dynamism and of the absence of recent speculative developments, the vacancy level is continuing to plunge. It currently stands at around 4.5%, which is the lowest level in Europe. But the substantial differences between districts have to be borne in mind: for while Kirchberg is recording vacancy of under 2%, the Strassen and Contern zones, for example, are approaching 20%. These differences may begin to slightly decrease over the coming months, as the low level of speculative developments may force occupants to (re)locate into more decentralised areas.
It should nevertheless be noted that occupants favour the most central locations above all, with buildings providing the best energy performance and the most efficient workspace solutions. The lack of this type of product in the most central districts could, as a consequence, fuel activity in the more decentralised districts.
It is also important to bear in mind that of the 300,000 m² of offices set to come to the market in 2016 and 2017 (in particular the BGL Tower, the One on One, Boulevard Royal 4, the Carrefour building), which represents an increase of 8% of the total stock, only 50,000 m² are being constructed at risk. And it is precisely in the city centre that the majority of this speculative development is taking place, as it is possible to identify at this current time some 30,000 m² without occupants in the above-mentioned buildings.
The tension between supply and demand may thus decrease over the coming months, although with a vacancy level of around 3% in the central districts, it will still be felt, persuading certain occupants to move towards neighbouring districts, looking for available space while still benefiting from services and public transport. Lombard Odier took the lead here, showing confidence in Cushman & Wakefield in order to plan its growth in the commune of Luxembourg by renting over 6,000 m² at 291 Route d’Arlon , close to the CBD.
Over the longer term, the project is going to completely redesign the entry to the Kirchberg plateau. Cushman & Wakefield has indeed been mandated by Allfin to market the office space (over 6,800 m²) and retail space (over 6,500 m²) of this mixed project (there are also two residential towers), which is so iconic for the future of Kirchberg. Delivery is scheduled in 2019.
Where rental levels are concerned, they remained relatively stable throughout 2015 compared to 2014 over the whole of the market with the exception of the Station and Kirchberg districts which recorded slight increases to € 35/m²/month. The so-called ‘prime’ rents are in the region of € 45/m²/month in the CBD.
The investment market above the billion Euros mark for the second consecutive year
The year just ended also proved to be very buoyant in terms of investment, as the symbolic threshold of one billion Euros was exceeded for the second consecutive year. And 2015 even proved to be 10% higher than 2014, with a volume of over 1.1 billion Euros.
This impressive volume is of course largely the result of the sale of the mixed Royal Hamilius project at the beginning of the year for almost 300 million Euros (Cushman & Wakefield advised the vendor, Codic, in this emblematic transaction). But it was not the only one, as other buildings located along the Boulevard Royal also sold for more than 62 million Euros by Leasinvest. In total, office buildings represent almost 700 million Euros within the overall volume, of which more than 400 million Euros are located in the city centre.
What is most striking about the investment market is the diversity of origins of the incoming capital recorded in 2015. Luxembourg players thus now represent less than 25% of total investment, while American operators are ever more present, with the advantage of high liquidity levels and an interesting dollar/Euro exchange rate. But alongside the Americans, the Middle East has also made a flamboyant entry onto the market, because it is a sovereign fund which got its hands on the Royal Hamilius at the beginning of the year. The availability of capital and the economic climate are reinforcing the appetite of investors for higher investment volumes.
The average transaction size thus reached more than 30 million Euros in 2015, and 10 transactions of over 40 million Euros were even recorded, against only 4 in 2012.
The volume of foreign capital, allied to the low interest levels at worldwide level, are increasing competition to acquire real estate assets across the whole of Europe, and Luxembourg is no exception. The direct consequence of this growing competition is an increase in prices, and therefore a decrease in yields. These now stand at around 5.1% for 3/6/9 leases and are set to fall below the 5% mark over the coming months, so fruitful is the Luxembourg market at the moment.
Retail market reinforces its fundamental position
Dynamism within the retail market of the Grand Duchy of Luxembourg remains very high, as is demonstrated by the interest of both retailers and developers in taking strategic positions on the market. As demand remains higher than supply, rental levels remain very stable. Take-up is also at a high level.
The new shopping centres and the iconic developments in the city centre are fuelling in particular the desires of a good number of international retailers, and more specifically those active in the upper range and luxury domains. The Grand-Rue is fully occupied, the retailers already present moving and enlarging, and new international retailers arriving. In the light of this lack of space in the Grand’Rue, retailers are developing in the perpendicular streets.
The Royal Hamilius project currently being developed is certain to fuel the desires of retailers, through its location, its accessibility (set to further improve thanks to the future tram station which will be located at the foot of the building), its architecture and its positioning at one of the two entrances to the Grand’Rue. This positioning will complete and reinforce the city centre pedestrian circuit and considerably increase the attraction of the City of Luxembourg. And the FNAC has just confirmed its arrival in Luxembourg, on the ground floor of this building. Cushman & Wakefield is closely involved in the marketing of this project, which is scheduled to be delivered in phases (2018 and 2019). The FNAC will, in particular, open its doors in 2018.
On the Kirchberg plateau, the mixed ‘Portes de l’Europe’ project, recently renamed Infinity, is sure to attract attention too. Apart from the huge arrival of a mix of functions (some 6,800 m² of offices and two residential towers of more than 20,000 m² are scheduled in the project), the marketing of the 6,500 m² or so of retail space located in the base unit of the building, is looking more than promising, numerous potential tenants having already shown their interest.
But the city centre is not alone in seeing new developments, and we can point in particular to the Opkorn Differdange project, (delivery scheduled for 2017) which will offer some 33,000m² including an Auchan hypermarket (delivery scheduled for 2017), the new Cloche d’Or shopping centre, which will become the largest in Luxembourg with more than 75.000m² of retail space (delivery scheduled for 2019) and also a 10,000 m² development at Bettembourg for 2017.
The retail market is in good health, competition is growing and projects are being developed. It has to be said that the catchment zone is enormous. The opportunities for the market to extend, particularly thanks to the frontier towns, have in particular been seized by developers, and these projects should go a long way towards responding to the imbalance between supply and demand at the current time.