Luxembourg, 17 January 2014
2014 Real Estate perspective for Luxembourg: positioning itself among the top markets in Europe
Luxembourg’s traditionally strong real estate markets are entering another promising year in 2014. Luxembourg will be among the most attractive European real estate markets this year again, according to the results of EY’s “trend indicator real estate assets investment Europe”, a survey which includes Luxembourg for the third time this year. Over 80% of participants consider Luxembourg to be an attractive location for real estate investments compared to other European countries. “This positive market outlook is likely to lead to sustained high demand and hence increasing prices for office buildings in prime locations, while other asset categories and assets in non-prime locations will see a stable or decreasing demand”, comments Michael Hornsby, Partner at EY Luxembourg and EMEIA Real Estate Funds Leader.
Basle III: a challenge in 2014
There are only some clouds on Luxembourg’s real estate horizon. Basel III is expected to be challenging in 2014. An increasing majority of respondents think that banks will reduce their activity in financing real estate assets due to Basel III requirements. Hence, alternative debt providers will increasingly have to provide financing for real estate. The greatest impediment for deal flows is the limited availability of both senior and junior debt funding: senior debt funding (93% of participants), junior debt funding (87% of participants).
With respect to the purchase price, expectations vary greatly depending on location and type of use. While prices for office buildings in prime locations are expected to increase, prices for that asset group in secondary and peripheral areas are clearly anticipated to drop. Concerning retail buildings, a majority of respondents expects a price decrease regardless of the location. With regard to the prices for residential buildings, expectations are also widely negative. With regard to the different locations, hardly any investor focus is evident. If any, it lies on Kirchberg (6%) which appears more highly favoured for retail investments than is the case in other cities.
As in recent years, REOCs/REITs are again expected to be the most active seller group, ahead of international funds. In contrast to the 2013 survey, open-ended funds are seen as a very active buyer group in 2014. Ranked in the 1st position last year, opportunity/PE funds are again expected to be a very active buyer group this year.
The European real estate market in general – a positive outlook
The EY’s “trend indicator real estate assets investment Europe” survey was conducted in 15 European countries among approximately 500 market players. The interviewees consider the majority of the surveyed countries attractive or even very attractive. A clear majority in each of the countries think that their market will be attractive to real estate investors in 2014. The positive change in sentiment compared to 2013 is particularly striking in the countries hit hardest by the Eurozone crisis – Spain and Italy.
Transaction volume is set to increase in 2014 for the second straight year, driven largely by cross-border investments, with Spain and Italy featuring the strongest growth. As markets improve and the supply of core assets remains low, the investors’ appetite for risk is expected to increase.
With respect to real estate capital markets, most European countries no longer view the Eurozone sovereign debt crisis as the main driver for investments and concerns about the impact of inflation have decreased compared with last year’s survey. Most European countries expect supply to increase in 2014, due to the maturity of structured debt, the disposal of non-performing loans (NPLs) and the liquidation of open-ended funds. The commercial mortgage-backed securities (CMBS) market is expected to rebound, particularly in the most liquid property markets of the core Eurozone. New debt sources are likely to help reduce the funding gap in the most liquid European markets.
Real estate operating companies (REOCs), real estate investment trusts (REITs), international funds and private equity (PE) funds are expected to be among the most active investors in real estate throughout Europe in 2014, on both the buy and sell side. While European investors at large will focus their strategies most strongly on residential property, investors in the UK, Spain, France, Germany, Sweden and Italy show the strongest interest in office properties. Respondents in most countries believe brokers will lose market share for renting or selling residential real estate to internet listing services.
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Download the survey. (pdf, 2mb)