Will we see the return of ownership, or will 2011 be like 2010: a year of “tenancy”?
In a currently fragile economic environment, we should remain cautious in our projections about real estate in Luxembourg. Certainly a return to economic growth (3% STATEC source) seems to be emerging, but still with limited effects on the real estate sector in view of macroeconomic indicators (high unemployment, low inflation). However, property should nevertheless benefit from the prospects of economic recovery and from firms’ renewed optimism and interest in the subject of real estate.
Given the low level of deliveries expected in the next two years (90 000m ² in 2011 and 30 000m ² in 2012, including a significant portion of speculative projects), the rental market should be characterized by a downward trend in vacancy rates, which could drop below 7% during the year, although sub-market variances will remain.
Despite relatively large differences in rent, the CBD and Kirchberg should always remain more popular than the periphery or decentralized sectors of the city.
The level of new demand has continued to rise since Q4 2010, not only for small- and medium-sized projects, but also for floor space over 1000m². Large occupants may in fact be increasingly aware of a tightening of new supply. This might lead them to reconsider actively moving to newly built space or towards refurbished second hand buildings.
To some extent, a shortage of quality supply in 2011 could redress the current imbalance between landlords and tenants thereby giving landlords more weight in negotiations with tenants.
Nevertheless, owners continue to show some flexibility in order to attract quality candidates to occupy their buildings. At the same time tenants should aim to limit their demands vis-à-vis landlords, or at least rationalize them.
What are the ways forward in terms of headline and net effective rents?
With the situation described above, no significant rebound in rental levels is expected in 2011. Generally, the downward pressure on rents will continue to decline, and rent levels will stabilize, as it has been the case for 6 months in the CBD and Kirchberg.
Rental increases should not be considered until 2012, and landlords may continue to offer incentives enabling net effective rents to remain attractive, in order to both encourage tenants in their decision-making, and to continue to distinguish their buildings from those of their competitors.
However, if the vacancy rate decreases beyond projections, the gap between contracted rent and net effective rent could also be reduced more significantly.
Tehdi-Edouard BABIGEON
Manager – Agency
Note: This post is adapted from an article published in French in Le Jeudi in February 2011.
