Bank woes cast pall over Luxembourg office market

LONDON, June 2 (Reuters) - Contraction in Europe's financial sector will slam the brakes on Luxembourg's office market boom this year, research from global property services firm Savills (SVS.L) indicated on Tuesday.

Home to one of Europe's biggest fund management communities, more than 150 financial institutions reside in Luxembourg but demand for office space in the city has dropped significantly, constraining growth for the rest of 2009 and 2010, Savills said.

The vacancy rate currently stands at 2.05 percent but could rise as high as 5 percent after 170,000 square metres (1.83 million square feet) of offices -- 70 percent of which have been speculatively built -- hit the lettings market this year.

"... Reality has sunk in across the property sector and with a record run in both leasing and investment markets over the past three years, we do anticipate a tough 2009 and 2010 for Luxembourg," Sheelam Chadha, head of research at Savills Belux said.

The report states that during the first quarter of 2009, the take up of office space reached 14,200 square metres (153,000 square feet), representing a year-on-year fall of 71 percent and a fall of 60 percent compared to the first-quarter five-year average.

The top quartile of all known rents dropped 12.5 percent to 326 euros ($463.40) per square metre in the first three months of 2009 versus the first quarter of 2008.

Savills said no investment property transactions took place in the first quarter of 2009, reflecting a lack of buyers, a lack of property on the market and uncertainty over true market value.

Savills estimates the average investment yield of Luxembourg office real estate is between 6-6.5 percent. ($1=.7035 Euro) (Reporting by Sinead Cruise; editing by Simon Jessop) (See www.reutersrealestate.com for the global service for real estate professionals from Reuters)