LUXEMBOURG / Office Q2 2023

Towards a cap on prime yields?

At its June meeting, the European Central Bank (ECB) hiked interest rates by 25 bps to 3.5% This eighth rise, lower than the previous ones, signals a slowing in rate hikes, since the ECB is approaching its “cruising altitude”, and the global environment is shifting, with the U.S. Federal Reserve widely expected to put its tightening cycle on hold. As a result, prime yields have been revised upwards again to a level of 4 60% for standard leases

However, even after the ECB’s unprecedented campaign, headline inflation continues to run at more than three times then central bank’s price stability target. Therefore, Christine Lagarde, President of the ECB, has stated that “stubbornly high inflation all but guaranteed another move next month and likely beyond that too”, which have the effect of increasing prime yields even further, to 4.80% by the end of the year.

The investment market is still ice cold

The market was already investing more than a billion euros in the Luxembourg office market at this time last year, but the volume invested currently totals only 25 MEUR. “Big tickets” that fuelled the investment market last year are already a thing of the past, with current volumes peaking at 17 MEUR.

The continuing rise in yields and tightening financing conditions has significantly impacted the investment market in the first half of the year, and trading volumes currently being lower. This semester’s average transaction volume is at 12 MEUR, compared to 50 MEUR last year. The only transaction recorded this quarter is the sale of Monterey 18 by Nextensa for 7 5 MEUR

Exclusively local players

Due to uncertain economic conditions, some investors have adopted a more cautious approach and have paused their investments. The market is no longer attracting investments from beyond Europe, and now relies solely on local investors. Since H2 2022, almost a fifth of the volume recorded has come from Luxembourg players, with the rest of the volume coming from neighbouring countries, especially Belgium.

Furthermore, five of the eleven transactions recorded over the same period, were in the Value-add/Redevelopment field, demonstrating the opportunism of investors striving to create value in renovation projects.