Banking and financial tenants maintained a strong level of demand accounting for 25% of Luxembourg's lettings market during 2009. According to international real estate advisor Savills these tenants, who historically represent the key driver for the leasing market, are nevertheless unable to absorb the high levels of new stock which is causing vacancy rates to grow.
Savills reports that total office stock at year end 2009 amounted to approximately 3.1 million m² in Luxembourg. Of the 166,000 m² of new deliveries in the market in 2009, 80% was speculative causing the vacancy rate to rise from 2.05% to 5.34%. Furthermore, the market is set to see a further 302,000 m² of new stock delivered in 2010 and 2011 putting supply at an all time high and vacancy rates to a potential 7.8%.
Sheelam Chadha, head of research for Savills Belux, comments: "The domestic recovery of the letting market will be key for Luxembourg in 2010. There are clear signs of recovery in wider Europe but Luxembourg has a lot of surplus stock compared to its usual levels and this may cause further uncertainty in rental values."
The report states that due to a lack of market transactions both rental and investment values have been hard to track. Prime rents currently stand at close to 420 m²/year representing a decrease of 12.5%. It is estimated that investment yields have shifted from 5.35% to 6.25-6.5%.