Luxembourg: high potential, low risk
Luxembourg is a center of international finance and an administrative headquarter for the EU. Moreover, the successful expansion of CLT-Ufa (RTL) made Luxembourg one of Europe’s most important locations for the TV industry. All this results in a significantly above-average share for service industries in total regional production. Within manufacturing, which accounts for just a small share of regional output, steel-producing industries play the most important role. In contrast to other steel-producing locations, Luxembourg’s steel industry succeeded in insuring its international competitiveness by specialising in sophisticated high-tech steels.
Feri Real Estate Market Rating rates Luxembourg as a business location “AAA”, which is upgraded from the first quarter 2014. It translates into “high potential, low risk”. With this rating result the city ranks first among European metropolises.
Regarding office real estate Feri rates Luxembourg “C”, which is downgraded from the first quarter 2014 and ranks 15th among office locations of European metropolises.
Luxembourg is one of Europe’s smaller office space markets, with around 3 mln square meters total volume. The prime locations, where the highest rents are charged, are in the central business district and near the train station. The largest sub-market in terms of floor space is Kirchberg, preferred by EU organisations and the international financial sector. The investment market is quite transparent, but the liquidity risk is relatively high.
The latest financial crisis had a moderate effect on office rents in Luxembourg, resulting in reductions of around 5%. Because of incentives offered to encourage the leasing of better-quality space, rents remained stable last year, despite a decreasing vacancy rate. From the supply side, the market should see further relief from its past looseness – new office completions are set to drop below the long-term average. Luxembourg’s economy is expected to grow better, which will support demand for office space and office rents should rise by around 2% per year over the forecast horizon, slightly above the long-term trend.
The price correction on Luxembourg’s investment market has been relatively moderate. Since 2007, rental yields have increased by only 80 basis points. Last year, the market remained stable, thanks largely to the great restraint shown by German open-ended real estate funds. Transaction volume picked up significantly in 2014 and let initial yields decrease further with a tight supply of high-quality objects. Over the year, a further slight compression of rental yields is expected.
In the retail sector, Luxembourg is a popular shopping destination for people from neighbouring countries. This pattern is supported by a large share of foreign commuters in the local workforce, as well as by the fact that local consumption taxes are low. Given Luxembourg’s good prospects for income growth along with easier shopping possibilities thanks to the introduction of the euro, chances are good that retail sales and hence retail rents, at both top and secondary locations will rise further in the coming years after a short break from 2009 until early 2010. Dramatically high price jumps will not occur.
When it comes to residential real estate, Luxembourg ranked tenth among European metropolises with a rating result of “A”.
Since the late 1990s both a positive economic performance and a rising population have helped to induce rising rents on Luxembourg’s apartment market. Yet no really dramatic price leaps are recorded. During the coming years, continuing albeit relatively moderate rent increases are expected, supported by Luxembourg’s good performance with respect to disposable incomes and ongoing solid demand, in conjunction with low new building activity. Among other things, enlargement of the EU provided a good boost for demand. However, because rents in the city of Luxembourg are enormously higher than those in surrounding areas, more activity in the rental housing market will shift outside the city.
Sale prices for residential real estate rose steadily through much of the last decade. However, the financial crisis caused a mild dip in the market in 2009. Since buildable land is both scarce and expensive, market activity concentrates on existing residences.
Demand for condominiums – particularly new, wellequipped condominiums as well as nicely renovated existing ones – has been notably high. Luxembourg’s favourable outlook for strongly rising disposable incomes – especially since these are already relatively high – supports an expectation for an upcoming increase in the region’s rate of home ownership.