The Luxembourg market awash with capital

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In 2015, the Luxembourg market posted the highest level of take-up ever recorded, as well as the largest investment volume since 2007.  Cushman & Wakefield Luxembourg transacted and advised on almost 40% of the capital invested. Cynthia Lheureux, Senior Investment Advisor at Cushman & Wakefield, shares her views on the market.

2015 was a record-breaker. Firstly, the letting market reached its peak with a take-up of around 335,000 sq m, the highest level ever recorded, compared to an average of 162,000 sq m over the last 5 years. 

This huge increase was largely due to a number of substantial transactions including the 105,000 sq m leased by the University of Luxembourg in Esch-Belval, the completion of the brand-new 48,000 sq m headquarters for Arendt & Medernach and Ernst & Young in Kirchberg, as well as leases by European institutions (European Commission and European Investment Bank) for 61,000 sq m in Cloche d’Or and Kirchberg.

Kirchberg and the Periphery were therefore the most active districts in terms of take-up with 140,000 sq m and 150,000 sq m respectively in 2015.
As corporates value building quality, the level of facilities available in the neighbourhood and access to motorways and public transport (including the arrival of the tram), the level of take-up seen in the CBD and the station district over 2015 was an underperformance (23,000 sq m and 9,000 sq m respectively) due to a lack of vacant office space.

Increase in activity from the public sector and Europe
If we take a closer look at the main active sectors over 2015 (Figure 1), we see that, with 38% of the overall take-up, activity was mainly driven by public & non-profit sectors. This was mostly due to the University of Luxembourg’s 105,000 sq m lease.

European institutions have also been increasingly active in recent years. In 2015, they accounted for 18% of take-up (compared to an average of 9% in previous years). This was mainly due to the leases carried out by the European Commission and the European Investment Bank.

It comes as no surprise that there was a high level of activity from the banking and finance as well as the service sectors, which accounted for 14% and 18% of take-up respectively.

Very limited speculative pipeline
With about 320,000 sq m, the pipeline for 2016 and 2017 is huge, but only 65,000 sq m is to be developed on a speculative basis.

The two main projects of 2016 are KAD (120,000 sq m which is to be fully occupied by the European Parliament) and oKsigen and eKinox (i.e. BGL BNP Paribas’ 55,000 sq m extension, 8,000 sq m of which is to be let). Both are located in Kirchberg.

Four projects are currently under construction in the CBD and due for completion in 2016. These amount to a total of 20,500 sq m, of which only 5,000 sq m has been pre-let. The different projects are One on One (3,000 sq m), Carrefour (11,000 sq m), Royal Grace (1,500 sq m) and Royal 20 (5,000 sq m fully pre-let).

Longer term, there are two major mixed-use projects worthy of note: Royal Hamilius and Infinity. While the 10,000 sq m of office space (in addition to retail and residential space) at Royal Hamilius will reshape the heart of the city centre, the 6,800 sq m of office space (plus retail and residential) at Infinity will transform the entrance to Kirchberg.

One of the most expensive cities in Europe 
With a low level of speculative developments and a sustained level of activity, the vacancy rate currently stands at a low average of 4.2%. As usual, this is the lowest in Europe. This also explains why Luxembourg is the sixth most expensive city for office space in Europe after London, Paris, Zurich, Dublin and Stockholm. The prime rent currently stands at €45 / sq m / month (which represents a rental growth of 29% since 2009) and is still under pressure.

Exciting time in real estate investment
As far as capital markets are concerned, the volume invested in Luxembourg stood at a high €1.1 billion in 2015, representing a 10% increase compared with 2014 and a 30% increase with the five-year average. This is the highest level recorded since 2007.
Investment volume was mainly driven by the sale of the iconic mixed-use Royal Hamilius project to ADIA. This €300 million transaction was carried out by Cushman & Wakefield on behalf of the developer Codic. Other significant deals, such as the sale of Vertigo by Irish Life to Starwood for €120 million, the Deutsche Bank HQ by IVG to Moor Park Capital for €72 million and Monnet 3 by LBLux to AG Real Estate for €70 million, made 2015 an outstanding year.

The office sector has always been dominant in Luxembourg. Since 2011, offices have accounted for over 70% of the total investment volume, compared with 20% for the retail sector. With €711 million invested in office properties, 2015 did not waver from the norm.

Capital invested is increasingly international
A closer look at the distribution of investment volume by nationality reveals that the market has become increasingly international. Investment diversification reached a peak in 2015 with domestic investors only accounting for 12% of the overall investment volume. Middle-Eastern investors (who acquired Royal Hamilius and the Hilton hotel) and US investors (who acquired Vertigo and the Deutsche Bank HQ) were active players in 2015 accounting for 28% and 17% of the market respectively. With 21%, Belgian investors also continued to play an important role. Finally, even though German and French investors still have a significant appetite for Luxembourg, they were clearly not aggressive enough in 2015 as they only accounted for 4% and 12% of the market respectively.

Big is beautiful
Another noticeable trend since 2014 is the return to bigger-ticket deals. Whereas transactions for more than €50 million only accounted for 11% of transactions between 2011 and 2013, the level has been at almost 20% for the past 2 years. In 2015, 7 deals out of 35 were for values in excess of €50 million. In addition to the disposals mentioned above (i.e. Royal Hamilius, Vertigo, the Deutsche Bank HQ and Monnet 3), it is worth highlighting the sale of the stunning Royal 20 to a private investor for €62.5 million, the White Pearl to the French insurance company Monceau Assurances for more than €60 million, as well as the sale of a share of the Breevast portfolio to CLE and Immobel for €54.5 million. Even though investors have been more cautious in their asset selection than in the past, once their interest is confirmed, they are eager to invest a maximum of liquidity and to minimise the time allocated to an acquisition process.

Arrival of opportunistic and value-added funds
Historically, Luxembourg has attracted core investors. The disposals of the Airport Center to a Luxembourg investor and of e-Building to Tristan Capital demonstrate that value-add and opportunistic investors have a growing appetite for Luxembourg. Further examples of this will be seen in 2016.

Taking on additional risk and managing assets more actively by accepting a less central location, a degree of rental vacancy, or investing in assets which require CapEx, allow investors to achieve higher returns. In the current market, this approach increasingly makes sense.

Prime yield under pressure
Indeed, the prime office yield has been under pressure and has reached its lowest level ever of 5.1% for a 3/6/9-year lease term. As there is a significant level of equity available in the market, a healthy economic climate and bond yields at a low level, the prime office yield should see further compression in 2016 and is likely to reach a historical low of 4.8%.

2016 will be another great year
Despite recent yield compression, prices in Luxembourg remain attractive compared to the vast majority of European cities.
This combined with the fact that Luxembourg is increasingly considered by foreign investors as a stable market, both economically and politically, with historically strong real estate fundamentals, and given the enormous amount of liquidities at a global level, we forecast that 2016 should once again be an exciting year for real estate in Luxembourg.