Brussels housing and office rent prices stable

Now that all 28 EU member states have elected 751 new members to the European Parliament, we take a look at the real estate market for Brussels.

Brussels is Belgium’s largest centre for trade and services, the country’s financial heart and several international and most of the European institutions have their seat here. This institutional configuration makes the size of the public sector in proportion to the region’s total economy quite large. The service sector accounts for the largest share of Brussels’ regional output, and will continue to rise in importance during the years to come, to the disadvantage to the industrial sector.

The Feri Real Estate Market Rating, that includes data for more than 150 cities in Europe, in the United States and Asia, rates Brussels as a business location “B+”, which is downgraded to the 3rd quarter 2012. It translates into “Above average potential, below average risk”. With this rating result the city ranks 20th in the comparison of European metropolises.

OFFICE

Regarding office real estate Feri rates Brussels “B”, which is unchanged compared to the 3rd quarter 2012. The city ranks 5th among office locations of European metropolis cities. Feri awards the office top locations “B” and the side locations “C”.

Brussels is one of Europe’s larger office markets with around 13 mln square meters of space. The Leopold district, where the EU Commission and the European Parliament are seated, is an absolutely prime location. Other prime locations are City Center and Avenue Louise. The greatest demand in Brussels comes from the public sector, followed by the financial sector and business services.

Average and top rents have risen again since the middle of 2009. Since 2011 rents have been stagnating. This development is expected to continue over the next two years. A sustained trend of noteworthy rent increases will not become well established until the vacancy rate declines again and approaches or goes below the long-term average. This presumably will occur at the end of the forecast period. The current project pipeline indicates that more office space will enter the market in the next two years. Over the forecast period, we estimate the annual rate of rent increases at 1%.

When the last investment cycle reached its peak in the middle of 2007, initial yields in the prime segment of Brussels’ office space market fell clearly below the justifiable long-term average. The correction that followed led to an increase of about 100 basis points by the middle of 2009. The anticipated rate of rent increases and foreseeable risks are again being priced more realistically. Since 2012 yields have been rising slightly again – due to revised expectations in terms rent increases and the ongoing euro zone crisis as well. During the current year, rental yields are expected to increase. Stabilisation might be possible in 2014.

The level of initial yields in Brussels’ office market is currently 40 basis points from Feri’s assessment of fair value. The current price level thus offers opportunities to enter the market, especially since rents have stabilised. However, the supply of high-quality core properties is now increasingly limited in Brussels. Nonetheless, as rents increase in line with consolidation of the recovery, objects of good and average quality are going to find a market again. At present, rental yields are significantly above their long-term fair value.

RETAIL

In the comparison of European metropolises regarding retail, Brussels placed 8th with a rating result of “A”, which is unchanged compared to the 3rd quarter 2012.

Since Belgium imposes stern restrictions on the planning and construction of shopping malls, shopping centres are a comparatively unimportant factor in retail competition. In Brussels, inner city shops, rather than stores in secondary locations, dominate the region’s retail activity. In recent years, a pattern of recurring major economic downturns restrained consumption and impeded total retail turnover. Reflecting this weakened situation, the rent performance for retail space, especially for space in the best locations, has been virtually stagnant. However, rents for retail space in secondary locations have managed to post some recent rises. In the years to come, inner city retail rents will resume a pattern of stronger increases, if only because Brussels’ strict planning restrictions will keep a lid on supply.

RESIDENTIAL

When it comes to residential real estate, Brussels placed 8th among European metropolises with a rating result of “B+”, unchanged from the 3rd quarter 2012.

Rental housing demand from employees of the European Union and other institutions have become notable since the end of the last decade. Nevertheless, the market has not exhibited any remarkable tightness in supply. Thus, drastic leaps in the rent level didn’t occur, although rents for both existing and new apartments have posted continuous increases for a considerable number of years. In the upcoming years, the positive rent performance for both existing and new apartments will continue. In the wake of the European Union’s eastward expansion, demand from employees affiliated with EU institutions provided further impetus for the market.

On the residential property market, prices have shown a strong tendency to increase over the last years. The segment of detached singlefamily houses displayed the most robust price increases, while condominium prices have performed weaker. In contrast to other European cities, Brussels’ price level for residential property is still moderate. In the years to come, one can expect the market for purchase of residential property to register further price increases. However, the current economic downturn will delay this development. Eventually, prices will rise in all segments of the market, although prices for condominiums will not begin to accelerate until the medium term.