Thanks to its wide range of efficiently regulated and unregulated entities, as well as high standards of investor protection, Luxembourg is recognized as a leading hub for the structuration of investments in European and global real estate (cf. our Analysis Luxembourg Real Estate Investments on October 10, 2017). In recent years, however, the market has shifted toward investments in Luxembourg-based real estate. A strong financial sector and stable political situation, along with the need for office and residential space to match the city’s growth, make Luxembourg appealing to real estate investors.
The Real Estate Market’s Rapid Expansion
Since 2014, annual real estate market transactions have consistently surpassed the billion-euro threshold. That upward trend multiplied notably between 2015 and 2016, increasing from €1.1 to €1.35 billion. 2017 confirmed this trend, peaking at €1.38 billion and forecasts for 2018 are highly promising despite a relatively calm first quarter.
Brexit to Boost Investments
As highlighted by experts, the announcement of Brexit considerably shaped this surge. Luxembourg’s real estate market is considered to be one of the only in the world that tangibly benefits from the UK’s 2016 referendum, since many investors see it as an attractive alternative to London.
As the UK announced its departure from the EU, Luxembourg was already positioned as an ideal entry point into the EU market. Its resistance to the 2008 financial crisis and outstanding economic growth reassure investors looking for safe capital investments. As a matter of fact, Luxembourg was ranked as a top city in terms of expected increases in rental and capital value in 2018.
Regarding sustainability and technological development, the Grand Duchy also leads the pack. Eco-friendly construction has become a top priority, resulting in a growing number of green certifications. The government has massively invested in ICT infrastructure (data centers, dark fiber, 5G, etc.) and data security. It is equally committed to providing the ideal legal framework for investors and residents, as shown by the recent adoption of the new law on commercial lease agreements (cf. our Analysis New Law on Commercial Lease Agreements on March 13, 2018).
Luxembourg’s real estate sector still faces some real hurdles. The market risks overheating as demand significantly exceeds supply. Sustained population growth boosted by an influx of foreigners led to a housing shortage and infrastructure deficit. As for office space, demand is quickly increasing, already resulting in a 2017 vacancy rate of below 5 percent. Furthermore, private placements prove difficult amid low yields. Rates of return have stabilized at around 4.35 percent in prime districts (e.g. La Cloche d’Or, Kirchberg) and 6.5 percent in the periphery.
However, strong GDP growth paired with the government’s commitment to develop infrastructure and rebalance the market are promising signs for real estate investors. Experts forecast a cooling down of the market in the coming years. The best indicator for this positive prospect may be the arrival of foreign institutional investors, who, until recently, were frightened by a lack of transparency and scarcity of other active investors. As the market became more professional and transparent, this situation entirely changed. With Brexit compounding the country’s attractiveness, it seems that Luxembourg’s real estate market has its best days ahead.
Kaufhold & Reveillaud has solid experience in local and global real estate markets. In 2017 alone, we closed property transactions in Luxembourg totaling approximately €150 million, not to mention our structuration activities for investments abroad. Our real estate department would be delighted to assist you in both the structuration of real estate via Luxembourg and projects based in the Grand Duchy, including shares or asset deals agreements.
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