LUXEMBOURG / Office Q4 2022

A bad year for the economy...

The European Central Bank (ECB) raised its interest rates by another 50 bps to 2% at the December meeting, moving further away from a decade of ultra-easy policy. That decision, which was expected, marked a slowdown in the pace of tightening compared to the ECB’s two previous 75 bps hikes, as price pressures show some signs of peaking and a recession looms

As a result, prime office yields have been revised upwards again this quarter to a year-end level of 3.80%. The very likely upcoming ECB interest rate hikes should lead to a further correction in prime yields, which could then rise to a new threshold of 4.35% in 2023. More information are available here.

But Also For Investment Market

More than EUR 110 million was invested in the Luxembourg office market in the fourth quarter of 2022, bringing the total volume spent for the year to roughly EUR 750 million, a first since 2013, when less than EUR 1 billion was invested yearly. However, after two usual quarters, trading volumes have slowed down in H2. The rise in yields witnessed in Q3 and Q4 has significantly impacted the investment market this quarter, and trading volumes currently being lower. Although a theoretical yield adjustment is detected, the practical results are not. The disparities between districts are narrowing, and transactions are still being completed with uncorrected yields. RE Invest just acquired Bronze Gate in the Cloche d’Or for a yield of 3.60%.

Challenges ahead but with potential opportunities

Rising rates have pushed up property yields, causing values to decline. Despite the rise in prime office yields, the spread with bond yields remains historically low, indicating further potential declines in property values. Regarding our outlook, Cushman & Wakefield forecasting has elaborated a baseline short-term mild recession scenario in the Euro zone (50% probability). In this scenario, office property values could fall by 20% in Europe in 2023.

Just as investor demand has been curtailed, some property funds are dealing with a wave of redemption requests To raise cash, they may need to sell assets, adding supply at a time of falling demand.