Property investment

What are the prospects in Luxembourg?

The Luxembourg rental market

Should investors still invest in rental property in Luxembourg? Is it still profitable? Jean-Paul Scheuren, chairman of the Chambre Immobilière [Property Chamber] in the Grand Duchy of Luxembourg shares with us his expert perspective on this ever-growing market.

Mr Scheuren, what does an investor profile look like?

An investor is someone who buys accommodation with a view to renting it out. This may be a property developer, an investment fund or a private individual.

Should one still invest in a residential property?

This is still a good choice. With sustained demand through the installation of between 10,000 and 12,000 new students each year, and a provision only growing by 2500 to 3500 new accommodation units a year, this is a profitable investment! Currently, only a very small proportion of the total housing stock property is available for lease. From the moment an advertisement is placed online, within ten minutes, we start to receive responses… That says it all! The prospects in respect of demand are excellent.

Should an individual be investing in property?

Interest rates have never been so low. Someone with money in the bank that is returning close to 0% should invest. Investors often miscalculate the return on their investment as only the rental part of the return (the annual rental divided by the total investment). In order to evaluate the rate of return, the rental should be added to the tax advantages, and the costs of credit interest should be deducted as well as the costs of acquisition. By dividing the amount thus arrived at one obtains the true return on the capital invested. Currently the rate of return can easily be 6% with such historically low interest rates, not including any gains on realisation of the asset.

Does this constitute a new form of savings?

According to the amount of capital invested, the property investment becomes a saving that one creates thought the reimbursement of the capital. Currently, it is preferable to save €300 per month to repay a loan than to leave one’s money dormant in the bank. Property represents the best kind of investment, because Luxembourg has an excellent migratory flow. And this is not going to stop with ‘Brexit’…

Is it true that the fiscal reform also an encouragement to buying…?

In the fiscal reform, the State has introduced a reduction in capital gains on property assets for private assets. At the moment we are talking about a quarter of the average rate, or under 10% tax on capital gains, not to mention allowances (€50,000 every 10 years). To this is added the accelerated amortisation of 6% over the first 6 years on new residential premises, which represents an excellent inducement to the creation of accommodation.

For professional investors, what are the advantages?

Investment funds are not currently very active in residential property. They prefer offices or commercial property. This is a completely different purchasing rationale, a reverse calculation. They operate according to the “yield” system, namely the rental yield according to the rent obtained. In a period of high demand, the yield tends to reduce, and professional investors settle for a lesser level of return. This has an impact on the purchase price. The same applies to rentals. Some districts in Luxembourg-Ville are very sought after with rentals per m2 that can double in price. In Kirchberg, one should reckon on €28-32/m2 and rising to €50/m2 in the city centre. This represents some very attractive investment prospects.

For developers, is the situation more complicated?

The developer assumes the greater part of the risks. The developer’s profession is to create building projects. The new legislation provides for more land being released. However, the procedures for authorisation have not changed, which puts a block on the situation. We are the only European country that has so many difficulties in the implementation of building projects. For a standard PAP [individual development plan], one should expect 5 to 10 years if administrative procedures before being able to lay the first stone. This situation inevitably influences the penury of accommodation available. The government still has a lot of progress to make in this area. Therefore, by taking the decision to invest, the developer takes the risk that this will be a very protracted affair, and that their capital will therefore be tied up. And when capital is not turning over, this is dangerous for a company…

But the sector is doing well, even so…

The VDL [Ville de Luxembourg] is the first major city to have produced its new PAG [General Development Plan] since the 2004 law. This will facilitate procedures for the PAP [individual development plans].
This is a risky business with risky margins. In order to be able to borrow, banks are asking for larger guarantees. A private developer is obliged to take out a personal commitment on his property or individual assets. It is necessary therefore to have personal funds. It is not the developers who have profited from the increase in the price of land, but rather the landowners. The increase in prices, and the increase in land price which is logical consequence, has increased the level of risk to which the development of a property project is exposed.

Since the mid-70s, investments have never depreciated. How would you explain this?

This development goes hand in hand with the country’s economic development, which has also experienced constant growth, generating an increase in the purchasing power of the population. What an investor is interested in is the return on capital. The better the prospects, the less significant the purchase price becomes in the final decision. The investor knows they can sell their property at a profit when the time comes.
  Author: Emilie DI VINCENZO.