Luxembourg’s competition authority (Autorité de la concurrence) is walking a tightrope: in its , the competition watchdog notes that “70% to 80% of contract completion guarantees (VEFA, which stands for vente en l’état futur d’achèvement, or purchase of property not yet complete, editor’s note) are issued by insurance companies, with the remaining guarantees (20% to 30%) being granted by banks.”
The competition authority also recommends “clarifying market conditions and moving away from the current ‘grey area’” and that the government “formalise in law the end of the banking monopoly on completion guarantees.”
A balancing act? No. It’s the description of a reality in which the sector allows insurance companies to set up VEFAs while knowing that they are flirting with legality, while the national champions in insurance--Foyer, Lalux and Bâloise--are not.
There are two reasons for this. The first is that it is neither forbidden nor legal. The second is because compliance with the law of 21 November 2004 on the fight against money laundering and the financing of terrorism--which is unjustified, according to those who participated in the competition authority’s study--would result in red tape and additional staff costs to comply with the professional obligations arising from the legislation.
1,170 VEFA contracts for flats
At the end of 2022, there were almost 1,170 VEFA contracts for flats, according to figures gathered by the competition authority. It’s a figure that does not take houses into account and excludes grouped sales of flats (sale of several flats via a single notarised deed).
While we do not know the amount of VEFA for insurers, the sector study provides astronomical figures for the banking sector, which also include similar guarantees for other types of contract (public works, construction contracts, etc.):
- Spuerkeess (2022): €385,941,047, down 21% on 2021.
- ING (2021): “the real estate portfolio (transactional real estate view) represents €1.27bn in terms of limits and €0.93bn in terms of outstandings. Construction financing, represented by construction loans or the issue of completion guarantees, accounts for the majority of this.”
- Banque Raiffeisen (2022): €132,824,909.39 of “guarantees and assets given as security” in 2022.
- Banque Internationale à Luxembourg (BIL) (2022): €999,158,159 under “guarantees given to customers.”
- BGL BNP Paribas (2022): €256m for its “guarantee deposits paid and sureties provided.”
Insurers are taking on more risk
These staggering amounts (€2bn to €3bn, according to our imperfect calculations) therefore include “only” 20 to 30% of the Luxembourg guarantee market, since insurers bring in the rest.
Why is this? Because insurers are less demanding with pre-sales than bankers. 50% of pre-sales are generally sufficient for the former, while 75% to 80% are required by the latter, who simply take less risk in these contracts, which are compulsory for the promoter. If the promoter has already sold four out of five flats, it will receive the financing provided for by law as it goes along, and there will be less risk of running out of cash before the building or flats are completed.
“The only financial guarantees of completion recognised by the Grand Ducal Regulation of 1977, in the context of the sale in the future state of completion, are those issued by a banking and savings institution.” Insurers are therefore obliged to inform their customers of this particularity, which “also renders the VEFA contracts irregular in terms of the requirements set out in article 1601-5 of the Civil Code,” an irregularity that cannot be invoked in practice...
The competition authority therefore suggests that the regulation, which in any case has no legal force, be abolished in order to respect competition between the players in the two domains. This is especially true given that insurers are “subject to sector-specific regulation, implemented by the Commissariat aux Assurances [insurance commission, editor’s note] in Luxembourg.”
Another concern raised by Eurocaution
Not to mention the fact that banking establishments, in the name of the prudential diversity of their activity, could not meet the needs of the market.
Quoted in the competition authority’s document, insurance and reinsurance broker Eurocaution’s CEO, Alessandro Rizzo, who has always defended the same position on abolition, on LinkedIn points out another difficulty to be resolved: “One subject was not addressed in the sector study: the financial and legal conditions imposed by banks in the context of financing property projects. Many of our customers/prospects cannot become insurance company customers for fear that the bank will refuse them a loan to buy land and/or for fear of their commercial relationship with the bank.”
It’s a sign, as is often the case, that nothing is ever that simple.
This article was first published in French on . It has been translated and edited for Delano.