"We had developed many of the proposals cited by the professional chambers or political parties on the government's amendments to the draft law n°7642 amending the amended law of 21 September 2006 on residential leases", says Georges Krieger, president of the landlord union known as the Union luxembourgeoise de la propriété immobilière. Krieger is also senior partner at the law firm of Krieger&Associates.
He was reacting to the publication of the joint opinion of the Chamber of Commerce and the Chamber of Crafts They had said they were firmly opposed to these amendments which will have “very little positive impact on the evolution of rents.” ULPI had reacted very early to the presentation of these amendments presented by housing minister (déi Gréng) last October.
“Badly thought-out” regulation on shared accommodation
In sixteen pages published in November, and republished last January, ULPI analysed many points of the bill, such as the verbal lease contract, the framework for co-renting, the limitation of the rent to 3.5% of the invested capital, the calculation of the invested capital, and the rental guarantee. “In my opinion, the minister has come up with a proposal that nobody wanted, and I believe that it has been poorly discussed between the different political parties that are currently in power. We were never consulted about it. I would have come up with other ideas, for example about shared accommodation. I am not against the regulation of shared accommodation, on the contrary, but I think it has been poorly thought out,” says Krieger.
“As the minister of housing acknowledges, it is currently rare that a landlord in the 'classic' rental market can earn a rent of 5% of the invested capital, most often it is around 2.5%-3%. This income is discouraging for the lessor in view of the obligations they have to assume and it is not disputable that with a collective rental he can hope to achieve a higher income, especially when they own a larger property.”
"Reducing the total rental income in the case of shared accommodation to 3%-3.5%, as foreseen in the reform, will have the effect of discouraging this owner from opening his accommodation to shared accommodation. Why take on very high management costs and increased responsibility if the income is exactly the same?” he stated. “A higher rental income is the one and only incentive for a landlord to give their property to a shared tenancy. The rent limitation imposed by the legislator will kill private home-sharing!” says Krieger.
We don't only have new housing, more than 60% of Luxembourg's real estate is old, we can't ignore that and it is especially the old heritage that suffers from this reform.
Like the Chamber of Commerce and the Chamber of Trades, the property owners group ULPI has criticised the discounting of the capital invested after two years of the property's existence, and the lowering of the maximum rate of return, which it deems “counterproductive.” Krieger said: “In the 1988 revision of the law, it had been decided that people who do not invest in the maintenance of their property should suffer a discount on the capital invested so that they have a lower rent. In that sense, yes, it was normal. With the reform, this idea has been abandoned, it is said that everyone, according to the calculation of the capital invested, suffers a discount of 1% automatically every year, except the first year. Let's imagine that I have a proven invested capital of €1m--if the building is two years old it is 1% lower, so it is €990,000. If you do the maths, for a house in Limpertsberg designed in 1919, the rent has to go down by 100 times 1%, that's 100%, so for a house that's over 100 years old, the rent is automatically zero euros. This is absurd, no one has thought about this.”
“We don't only have new housing, more than 60% of Luxembourg's real estate is old, we can't ignore that and it is especially the old heritage that suffers from this reform.”
Another issue raised by landlords is the limitation of the rent to a maximum of 3.5% of the invested capital foreseen in the reform, instead of the 5% of the invested capital as it exists at present. The 5% rate was introduced into Luxembourg law not in 1955, but in 1948. By the end of the Second World War, the country had lost almost a third of its real estate assets. "In order to respond to a very strong social tension (which has nothing to do with the discussions that are currently taking place in Luxembourg and which are largely supported by the political parties), the legislator arbitrarily set the amount of rent at a fixed price per square metre (a system that existed in 1939). But this regime was hardly encouraging for new investments,” argued Krieger.
“Populist” initiative
“The lowering of the maximum rate of invested capital from 5% to 3.5% to set the upper limit of the rent is incomprehensible at the end of 2022. It was recently announced that sales of new homes fell by 23% last year, but this is not true, the fall started in August, so this fall is over four months, not twelve. Since August the market has been dead and now it's a collapse. The main cause of this is the sharp and rapid rise in interest rates. Any government-orchestrated discouragement of investment will be detrimental in such an anxious climate.”
Today, interest rates are rising significantly and sustainably towards at least 5%. "Why then invest in a product with a maximum yield of 3.5% if you can expect a much higher yield from a bank? Investors are completely discouraged from investing. And if private individuals who buy for their own homes are no longer the main players, there are only investors left, who buy to rent, and if they themselves are discouraged, there is no one left to buy,” he commented.
Krieger said: “The crisis we have at the moment has been made at the level of our government. We knew from 2021 that the banking problem of 2022 was going to happen and the housing ministry did nothing. On top of this, in 2020 we discouraged investors by largely diluting accelerated depreciation, with capital gains tax, and by having abandoned the super-reduced VAT rate of 3% for the second building. And now in the middle of the crisis, at a time when the whole market was completely blocked, the housing minister comes up with this populist initiative that discourages all investors. At the moment it is impossible to find an investor who wants to buy, and the minister of housing is responsible for this situation”.
This story was first published in French on . It has been translated and edited for Delano.