Eurocrats seek office at the centre of power

As home of the European Union, central Brussels has a seemingly recession-proof property market. With ten more countries set to join the EU by 2004, demand is bound to soar in the centre, and may spill over to revive the less healthy peripheral markets Interest in the Brussels property market is on the up as a result of the enlargement of the European Union (EU), with ten nations set to join in 2004, including Hungary, the Czech Republic and Poland. EU expansion means, of course, that a lot of office space will be required; between 180,000m2 and 500,000m2, analysts estimate. The higher figure takes into account the potential needs of the European Commission and Parliament, as well as Belgium’s administrative requirements. However, the European Commission’s budget for expansion has yet to be approved by the European Parliament. And until a decision is taken on exactly when the new countries will join – and whether there will be a second wave in 2007, including the likes of Romania and Bulgaria – it is hard to predict how much space will be needed. “Nobody knows exactly what will happen or how much space will be needed,” says Catella Codemer managing director Richard Boomer. “Once everything has been finalised, the European Parliament can decide on new budgets and an increase in personnel can be authorised. After that, they can start looking for office space. The Belgian government is looking for space, embassies are looking for space, so the Brussels market will remain strong, and the vacancy rate should remain under 3% in the centre.” Brussels tends to be viewed as a stable market; one that does not boom or bust, even in the current global economic slowdown. It is Belgium’s leading office market, with stock of around 12.2m m2. The market can be broken down into three key zones: the central business district (Louise, Leopold and Central); the decentralised district (East and West); and the periphery. Most European institutions, including the EU administration, are based in the central, highly coveted Leopold area. The central business district has a combined stock of around 7.8m m2 and accounted for 53% of average take-up over the past five years. The decentralised district, which caters mainly for the private sector, has 2.6m m2 of space and accounted for around 26% of average take-up. The periphery, consisting of the Zaventem and Ring submarkets, has been badly hit by the bursting of the hi-tech bubble. Technology companies have either moved out of the area or are sub-letting their space. Office stock amounts to 1.7m m2 in this district, with vacancy rates standing at over 20% and as high as 30% in some parts. Take-up averages around 21% of the total. European institutions will be keen to build on their presence in the Leopold area, but the limited amount of space could force them to move some departments further out. Historically, the institutions also like to block-build, taking space adjacent to other accommodation that they occupy. “They like to have just one entrance to a building because they like to control security,” says Tony Smedley, a national director at Jones Lang LaSalle. “This is what they’ve been doing near the Charlemagne and the Berlaymont – the biggest two buildings that they occupy. You can see examples there of where they have block built. But there’s only a certain amount of space left.” One chunk of space still left in the centre is the D4/D5 site, which includes offices of around 20,000m2 and around the same amount of space again in meeting rooms. The site will also house a museum, shops and 445 parking spaces. “It’s about the last chance for significant development in that area,” Smedley says. There is speculation over where government institutions will go next. Francois-Xavier de Donnea, president of the Brussels region, has said it would make sense to create a third district (the first being the Leopold area, the second the decentralised area) for European institutions in the North area, but a decision has yet to be taken. The EU already has two sites outside the centre: one in the area by the motorway to Luxembourg, the other near the road to the airport, so it may decide to extend its presence there. “It’s a difficult call,” says Smedley. “The EU administration certainly wants to stay in Leopold and I think it will almost always occupy buildings in a central area. I could see it taking the Madou Tower or at a push North Galaxy [both on the edge of central Brussels]. But the EU doesn’t like towers; it likes eight to ten storeys and block building. It might also separate out some of the departments within the European Commission; for example, it might decide that the Department of Education should go to the Madou Tower or the Department of Fisheries will be moved elsewhere,” he adds. Alessandro Bronda, head of European research at Catella Property Consultants, says EU expansion will be “a really big driver” of the Brussels market over the next two years. “In our report, we forecast a need for around 300,000m2 of additional space,” he says. Bronda believes a rise in the number of lobby groups active in the city will also fuel demand for space. “Every region in Europe has its lobby groups and more and more of them, from existing and pending member states, are coming to Brussels.” Bronda expects that European institutions will move out of the centre towards the east, where a lot of space is available if they run out of accommodation in the Leopold area. He also maintains that the EU will not want to be based in the periphery. “There is quite a lot of space in the Louise area, which is central, but the quality is not so good and the buildings tend to be smaller,” he says. Corporations will also be keen to have offices in Brussels so they can be close to where the key decisions are made, although some may be willing to be based further out. Prime Brussels rents have risen this year to €250 per m2, while rents at the Mondrian building in the Leopold area have reached €260. Prime yields stand at between 6.25% and 6.5%. Rents in the periphery have dropped to around €161 per m2 a year. “It’s in developers’ mentality to be competitive – nobody wants to overprice,” says Smedley. “But now is a good time to push rents up, because choice is limited.” New buildings in the centre will also have no problem finding buyers or tenants. “If you can get your hands on a project in the centre of Brussels, your risk of not leasing it is very low,” says Catella’s Boomer. “And the closer it is to European institutions, the better. It would have to be a good project, as secondhand buildings are not finding occupiers; everybody wants new buildings, but only one or two seem to be coming onto the market every six months.” But he adds: “For the next five years, we should have a very strong market. The long-term prospects for Brussels are fantastic. Only 60% of the people who live in the city are actually working, compared with over 70% in most cities, so Brussels still has enormous potential. I think the new countries [set to join the EU] will bring in all kinds of new people who will want office space here. Every region in Europe wants representation in Brussels.” Bronda maintains that “Brussels is the only market where we think prime rents are actually going to rise over the next six months – in the Leopold district. There is a shortage of space, vacancy is low and demand is strong.” He advises potential investors to “get hold of a nice property in the Leopold area, on a long lease”. Bronda adds that a list has been drawn up of another 52 countries that could join the EU – the same number of states as in the US. Clearly, EU expansion has barely started. The centre and the periphery: two separate worlds The central business district (CBD) and the periphery are two very separate markets. The wealth of European institutions in the CBD cushions the zone from economic downturns but the periphery has a very cyclical market. “The periphery has suffered a lot, so has the decentralised area, due mainly to their reliance on the corporate market,” says Tony Smedley, a national director at Jones Lang LaSalle. Many analysts believe that although the market has slowed over the past six to nine months, the effect has been quite localised, hitting the periphery the hardest. Alessandro Bronda, head of European research at Catella Property Consultants, believes the periphery’s situation could worsen: “It’s more difficult to get funding for buildings in the periphery, where prelets have fallen. Everyone is waiting for the rebound. It’s good that interest rates are at 40-year lows, but on the downside there have been severe falls on world equity markets. If these markets continue to fall, the recovery will take much longer to materialise. Rents in the periphery could fall further in the meantime.” DTZ chairman Philippe Winssinger says speculative building will increase in the centre and decrease in the periphery: “In the periphery the risk is hard to assess because there is already a problem,” he says. Before September 11, there were already new developments in the periphery near the airport. In the last quarter of 2001, vacancy rates soared from 10% to 20%. However, Catella Codemer managing director Richard Boomer is upbeat about the future of the periphery: “There is only one project under construction there now: the Sony building, which is one building of six in The Corporate Village. So vacancy rates in the periphery are improving – I think it’s over the worst. And I think people are getting more used to the idea of going to the periphery. The language barrier has been a problem, however. Central Brussels is bilingual, but as soon as you go a bit further out, you need French and Flemish, although this is not strictly the case, especially where US companies are concerned.” The short-term forecast for the CBD is good, while the future of the periphery is more uncertain. “The situation in the periphery will continue to be bad and people will have to suffer a fall in rents,” says Winssinger. “Vacancy rates in the periphery are high even though the buildings there are good. Investors should invest in the centre, with long-term leases, with a yield that is over the cost of their finances,” he adds. Selected Brussels Developments Project name District Developer Size m2 Available m2 Completion Tenant/comment 1 City Atrium Central Burco – CDP 43,000 43,000 2003 – 2 Terminal Building l Central Eurostation 40,000 0 2003 3 Belliard I-II Leopold Cofinimmo 34,000 0 2003 Committee of the Regions, Economic & Social Committee 4 HQ Fortis AG Central Fortis 24,000 0 2003 Fortis 5 Botanic Building Central Bernheim 20,000 20,000 2003 – 6 City Center Central Fortis 32,000 20,000 2003 – 7 Fonsny – Bloc B Central Swiss Life 18,000 6,000 2003 8 Royal Congrès Central Fortis 14,000 14,000 2003 – 9 Arenberg Central Almafin 14,000 14,000 2003 – 10 Woluwe Heights Decentralised Betonimmo 13,500 13,500 2003 11 Berlaymont Leopold Multi-owner 120,000 0 2004 European Commission 12 Terminal Building ll Central Eurostation 80,000 40,000 2004 13Madou Plaza Leopold IVG 40,000 40,000 2004 – 14 Mondrian Leopold All Build 19,000 19,000 2004 – 15 CIR (Tour Martini) Central Artesia 88,000 0 2005 Dexia 16 Espace Leopold Leopold Société Espace 35,000 0 2005 European Parliament L