The Grand Duchy of Luxembourg offers a host of possibilities for real estate investments both inside Luxembourg and abroad
With a well-known, first-class legal framework in place and high standards of investor protection, the Luxembourg real estate market earned approximately €1.1 billion in 2015 and €1.35 billion in 2016. The amount of net assets invested in real estate funds has continued to grow over the years and the flow of transactions exceeded the billion-euro mark for the third-consecutive time. All these features position the Grand Duchy at the top of the list of attractive places to structure real estate investments in Europe and worldwide.
Luxembourg real estate vehicles
Luxembourgish law provides an extensive, diversified toolkit of regulated and unregulated entities that offers solutions for all specific needs regarding real estate investment. The decision of which concrete vehicle(s) to choose depends on the specific needs of the investors (deriving from the legal requirements of their home countries, including tax requirements), the structure, the size and the type of property and its applicable legislation.
Regulated vehicles supervised by the CSSF
On one hand, there is the panoply of regulated entities that are under the prudential supervision of the Luxembourg Commission de Surveillance du Secteur Financier (CSSF). One of the most commonly used regulated entities is the socalled SICAV, an investment company with variable capital. The SICAV’s main characteristic is that its share capital is always equal to its net assets, so it does not require formalities for increases and decreases in capital. However, there is also an investment company with fixed capital (the SICAF) that can be useful in certain real estate structures.
Another fund structure very often used for real estate transactions is the so-called FCP, the common fund, an entity constituted in contractual form that must therefore be managed by a management company. The main characteristic of this fund is that it constitutes a co-proprietorship whose joint owners are only liable up to the amount they have contributed and whose ownership rights are represented by units. In order to complete the picture, Luxembourgish law offers the specialized investment fund (SIF), which is recognized for its flexibility regarding investment policy, as well as for its regulatory regime and publication requirements.
The Luxembourg investment Law then allows for the use of these structures in combination, for example usually a SIF will be in the form of a SICAV-SIF or FCPSIF. Furthermore, for some real estate transactions showing an especially high risk due to location or other reasons, the investment company in risk capital (SICAR) can also be used to structure the investment.
From a corporate law perspective, all the aforementioned vehicles may, in principle, take one of six corporate forms, i.e. SARL (private limited liability company), SA (public limited liability company), SCA (partnership limited by shares), SCSp (special limited partnership), or SCS (limited partnership). In concreto this means that a typical real estate fund would be a SCA SICAV-SIF.
These entities may be set up as a single fund or as an umbrella fund consisting of multiple compartments that may have unlimited numbers of share classes. These compartments allow the segregation of assets, including its accounting records, and the rights of investors and creditors concerning a compartment (or which have arisen in connection with the creation, operation or liquidation of that compartment) are limited to the assets of that compartment.
Finally, the Luxembourg securitization Law, due to its broad scope, might also be useful for the structuring of real estate transactions. Please note that a securitization vehicle can be constituted as a regulated or unregulated entity, as a fund or company, and it may be set up in one of the aforementioned corporate forms, including a compartment structure.
On the other hand, it is also true that a huge number of real estate investments are structured via unregulated entities, mostly as so-called SOPARFIs. The main purpose of a SOPARFI (Société en participations financières) is to hold investments in other entities. A SOPARFI can once again be incorporated into all types of commercial companies and are governed by the Luxembourg Law on commercial companies. Due to the special flexibility of the Luxembourg SARL (private limited liability company), most of these SOPARFIs are constituted in this form.
Features of the Luxembourg real estate market
Apart from the use of Luxembourg for the structuring of real estate in Europe and worldwide, the Luxembourg real estate market itself has become more and more interesting for internal and external investors. In December 2016, the biggest ever operation was realized with the sale of a 51,000-square-meter building for between €240 and €270 million. Besides that, 420,000 square meters in Place de l’Etoile, located in the city center and valued at about €150 million, were bought by the Abu Dhabi Investment Authority in April 2016. From January to July 2017 alone, approximately €490 million were invested in Luxembourg’s real estate.
Our experiences & latest transactions
Kaufhold & Réveillaud can provide you with assistance and guidance for the structuring of real estate transactions or regulated and unregulated vehicles.
Just recently in August 2017 we closed a €130 million real estate transaction concerning a new office building of 14,000 square meters (which is not even included in the above-cited figure of almost half a billion euros for the first semester of 2017!). This transaction was structured as a share deal with a Luxembourg SARL. Our services included the performance of extensive legal due diligence regarding the previous holding company and the asset, i.e. review of all relevant authorizations and permits from an administrative, zoning and corporate law perspective, as well as the negotiation of the respective share purchase agreement.
In the last 12 months, Kaufhold & Réveillaud has also performed due diligence of this type for several other real estate transactions, the biggest of which reached €25 and €160 million.
Finally, we would like to add that apart from the share deals, we are also handling “brick deals” of Luxembourgish law. Such transactions are more demanding with respect to the review of administrative law aspects (permits and authorizations) and can adopt the form of a notarial purchase agreement or of a purchase agreement of a building before completion — vente en état futur d’achèvement (VEFA). The VEFA shows some particularities in terms of formalities and content, and requires individual legal assistance for investors from outside Luxembourg.
We are currently dealing with a VEFA for a 1,400-square-meter building to be built on an emblematic spot in the center of Luxembourg City for €20 million.
For further information, please contact us!