Céline Coubray: How do you see the development of the property market over the last three years?
Romain Muller: The number one issue is, of course, housing, which is an integral part of the Luxembourg economy. If housing doesn’t work, we lose attractiveness compared with other countries. In the past, the imbalance between supply and demand has caused prices to rise sharply. There were two main reasons for this: the cost of land and construction costs, which have risen continuously over the last ten years.
Then the whole market was held back by rising interest rates. Today, the capitalisation of banks in Luxembourg has become a cause for concern. Their reluctance to grant loans, whether to developers or individuals, is a real brake. Local banks rigidly follow the ECB’s recommendations. France and Belgium are much more flexible, with more favourable interest rates.
As a result, some Luxembourg developers are choosing to develop residential property projects not in Luxembourg, but on the Belgian or French borders, where buyers can earn Luxembourg salaries and where banking conditions are more favourable. There is more scope for development, and building requirements are often lower.
In recent years, however, we’ve seen the opposite effect, with foreign promoters and developers, particularly Belgians, developing branches in Luxembourg.
Yes, but today, for residential property, it’s the other way round. Interest rates are currently starting to fall, which is a good thing, even if they are still more expensive than in France and Belgium. One area where we still have a problem is with loans for homes in the future state of completion (vente en l’état futur d'achèvement, or VEFA) and the financing of a bridging loan on a VEFA. In 2008, the banks were supported when they were going through the crisis, but today they are not making any effort to support the construction sector.
Has Luxreal approached the Luxembourg Bankers’ Association (ABBL) about this?
Yes, we have had several discussions with Jerry Grbic. As a result, the conditions for have been eased.
The difficulties encountered with certain bankruptcies of property development companies have brought to light complex issues relating to completion and/or repayment guarantees in the context of the VEFA, particularly with the exclusion of the land portion of the guarantee. This is also one of the obstacles to obtaining bank financing, as the risks are considered too high.
Yes, it should be a requirement imposed by the government that the completion guarantee, which can be transformed into a repayment guarantee, also include the land. If we want to protect purchasers and instil confidence in the VEFA, we need to legislate on this and create an appropriate and binding legal framework.
Romain Muller: “It’s certainly in mixed-use development that there are the most opportunities for investors, with projects that include coliving, office space, services and shops. Photo: Eva Krins/Maison Moderne
In Luxembourg, office property is another very important market, which has also been shaken up recently. What is your analysis?
The market was hit first of all by the absence of investors. With the rise in interest rates, the rates of return sought by buyers were much higher than those offered by sellers, which created a standstill. Today, the projects on the market are those of developers who bought land between 2019 and 2021, at the peak of the price curve, but with low rates. Now that interest rates have risen again, they find themselves with a business plan that is not working, even if they have signed a long-term lease.
So we’re in a situation where we’re waiting for the capitalisation rate to rise [the capitalisation rate is the ratio between the rental income from a building and its market value, editor’s note]. This is happening now, because on a European scale the rate was around 1.5% and we are back up to 4% in several cities. Generally speaking, Luxembourg is a market that slows down early and picks up late compared with other European capitals. We’re still going to experience a certain amount of inertia, but things are improving. In six months to a year, we’ll be seeing better capitalisation rates.
Doesn’t Luxembourg still have an advantage when it comes to office property, in that its staff are more present in the office than in other countries?
Yes, absolutely. The double taxation system means that we are limited in the possibility of teleworking, which means that we have to occupy a certain number of offices and therefore need more space. It’s also good for bringing together young talent, improving communication within companies and supporting business between departments. Luxembourg’s competitiveness vis-à-vis the rest of the world is enhanced by the presence of employees, because the quality of service is improved. It also benefits the local economy through purchases made in Luxembourg while employees are here.
Added to this is the growth in occupancy and therefore demand for floor space. There is also a demand for better quality offices that meet companies’ ESG criteria, or premises with better public transport links. Buildings along the tram route, for example, have appreciated in value.
Where are the current investment opportunities in Luxembourg real estate?
It’s certainly in mixed-use development that there are the most opportunities for investors, with projects that include coliving, office space, services and shops. There’s also a sizeable market in retirement homes, and in particular residences where you can buy your own flat, like a co-ownership in a retirement home, organised with a service company.
This is a product that does not yet exist in Luxembourg and for which the legal framework needs to be created to enable its development. The same goes for coliving, which still lacks solidity. When we talk about this type of project in a due diligence with lawyers, they confirm that it is tolerated today, but that it is still a fragile case. The legal frameworks sometimes lag too far behind the reality of the market. We have developers who want to get involved in this type of construction, we have interest from investors, the demand is there, but the legal framework is not in phase.
We also need to make the residential market accessible to institutional investors.
Can Luxembourg still remain a strategic location on the European investment market?
Absolutely. Investors are still very interested in Luxembourg, even if things have changed in recent years. Thanks to political stability and a favourable social context, international investors continue to take a close look at the Luxembourg market. Many funds are investing around the world and are based in Luxembourg.
Initially, these funds came here for the favourable tax regime, the double taxation agreements and the regulatory flexibility, but over the years they have also wanted to invest in real estate in Luxembourg. They then looked at Luxembourg not just as a financial centre with the skills to manage their funds, but also as a country that they liked and where they wanted to have assets. It's a really interesting development to observe.
Given the current upheavals in the office property and new residential markets, are other property markets, such as logistics, developing in Luxembourg?
Developing logistics is a very specific market. JLL recently completed a major deal with MG Real Estate and Vodafone for their new logistics centre in Bettembourg. But there aren’tt many European players in this field, and you also need a certain legislative framework to allow this type of development.
We have a card to play in relation to European networks, particularly the rail network, but we lack accessible land for this type of development. Logistics requires secure sites with strict fire regulations, which makes it difficult to combine them with other uses. The economy ministry should try to find land for these developments, which are proving successful, because there is demand for them. But the government needs to take the lead on this kind of land, because the local authorities are not going to do it.
Are alternative financing solutions emerging?
The new Basel IV regulations have been a topic since January. Bankers have confirmed to me that it’s going to be increasingly difficult for developers to finance greenfield projects, because they’re going to be more restricted in their financing. Once again, it’s a problem of bank capitalisation and inadequacy in relation to the size of the country. There is mezzanine financing [medium-term subordinated loans, generally seven to 10 years, editor’s note], but this is generally expensive, with rates of 15 to 20% per annum. Another possibility is to persuade wealthy individuals to lend their money for a given period at an interest rate of between 8% and 10%, depending on the risk. But this type of financing is expensive and reduces margins.
We can’t rule out the geopolitical impact, but if nothing negative happens in the next few months, we should be out of the trough.
Are we at the tipping point towards a new real estate era?
We can’t rule out the geopolitical impact, but if nothing negative happens in the next few months, we should be out of the trough. In about six months, the market should pick up again. The consumer confidence index is also rising, which is an encouraging sign. A number of people have been cautious about spending in recent years and now they want to invest. The covid crisis and the war in Ukraine have raised awareness of a number of factors and prompted changes in behaviour and consumption patterns. This is reflected in property choices, with greater attention being paid to energy consumption and a change in the way people think about property.
We can see that the younger generations are less attached to property ownership, that they see housing more as a service and less as an investment, and that they are more mobile.
Many young people see housing as a necessity to ensure they have a roof over their heads, but also as a major risk of financial stress. As a result, they prefer smaller properties to ensure a more manageable percentage of debt. And as car ownership is no longer a matter of course, they are favouring homes that are accessible by public transport. This represents a challenge for our villages, which are often poorly served.
Romain Muller: “Family offices have become stronger. So there are other ways for our players to access finance.” Photo: Eva Krins/Maison Moderne
In addition to the measures recently put in place by the government to support the sector, do you see any other initiatives that still need to be set in motion to improve the situation?
The return of VAT to 3% for investors would be a very good thing, because this measure could have a strong impact on the investment market. We also need to make the residential market accessible to institutional investors. We call ourselves a European capital, but we still do a lot of things like in a village.
We’re the world’s second-largest centre for investment funds and, on the other hand, we have to say no to institutional investors who want to put their money into local assets, because we’re protecting the market for residents who want to buy for their own use. If you want to be professional, you have to be professional about everything. And investment in housing has a positive knock-on effect on asking rents. The government should create suitable frameworks for institutional investors and enable young people to find housing in the country.
With the slowdown in construction, there is also the risk of a brain drain. How are Luxreal members reacting to this risk?
Our members are doing everything they can to ensure that the slowdown in the residential construction market is offset by public investment, so as to keep teams as busy as possible.
If, tomorrow, you had the opportunity to draft a document that you would submit to the government, what would be at the top of your wish list?
That would be institutional investment. Once the developer has planning permission, an institutional investor may be able to buy the entire programme. This avoids the problem of unsold properties and the financing difficulties involved in launching construction.
But we have seen in other European cities that having institutional investors in housing can also become a risk by adding extra pressure on selling prices, regularly increasing rents to maximise returns, or creating a disconnect with local needs...
If it’s not regulated, yes, but we can put a framework around it, say that the institutional investor can buy with tax benefits--accelerated depreciation, reduced VAT at 3%, etc.--provided that they have a certain threshold for rent and a certain number of lots. These investors would only have access to large-scale developments, which are currently posing difficulties for developers. We can meet the needs of the market by allowing the creation of housing for the rental market and help developers with large-scale programmes that hardly existed ten years ago.
So the residential market is now structured differently in terms of its typology, which would allow institutional investors to enter the market.
Absolutely. The market has changed. Today, the programmes under construction make it possible to target institutional investors, and their involvement in projects would relieve developers of the burden of bank financing costs, which are passed on in the sale price of flats.
What are the sector’s expectations for Mipim?
To make new contacts, in particular with investors who could enter projects early to take on the financial side and thus benefit from higher returns. But also in the financial sector, because this market has restructured recently, with family offices that have become stronger. So there are other ways for our players to access finance. These fairs also provide an opportunity to meet professionals active in other European markets and to get a feel for trends. This gives an idea of where Luxembourg could be heading in the next three, six or nine months.
Luxreal
Created in 2009, Luxreal is an association that brings together all professionals involved in the real estate sector in Luxembourg. Its mission is to be a think tank/network to discuss industry trends, strengthen the sector through working groups, encourage professional excellence, generate growth opportunities and represent members’ interests. Today, Luxreal has more than 320 members, ranging from developers and investors to architects, construction companies and service providers (lawyers, auditors, tax consultants). Luxreal also organises regular events and conferences.
Basel IV
Basel IV (or Basel III Endgame) is an international agreement aimed at strengthening the stability of the financial system. This involves a tightening of risk assessment by banks, forcing certain establishments to increase their capital cover. The financing of property development and new construction is affected by these developments, as obtaining credit may become more limited.
Event: Mipim 2025
The Mipim trade fair is held every year in Cannes, France. It is one of the major European events for the property sector. Luxembourg is taking part by organising a national stand, coordinated by the Chamber of Commerce. A reception will be held on the Luxembourg stand on 12 March. Paperjam and Luxreal will also be present. From 11 to 14 March,
The Paperjam Club is organising a on 23 April.
This article was written in for the magazine, published on 26 February. The content of the magazine is produced exclusively for the magazine. It is published on the website as a contribution to the complete Paperjam archive. .
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