As a well-known fact, the Luxembourgish residential market has been growing for more than 15 years in a constant and stable way, both in rental and sell prices. This circumstance alone puts Luxembourg in a unique position compared to its European neighbours which, at the same time, suffered crisis and experienced bubbles translating into extreme price peaks.
Ensuring attractivity in the long run
Consequently, Luxembourg has become even more attractive for developers and investors interested in having safe returns for their funds. However, the recent geo-political tensions and escalations as well as a global pandemic impacted the residential sector in drastic ways. Market players are forced to take action to meet the changed demands. This is critical to ensure that the attractiveness of Luxembourg’s residential market will be maintained over the next decades.
Traditionally, one of the elements sustaining demand for residential properties is the high purchasing power of its inhabitants. Luxembourg is one of the countries with the highest GDP per capita in the world. A very stable labour market, including a system of inflation-linked wage increases and further social benefits, provides an important baseline for stability and growth.
Expats and cross-border employees, a stratum of the population that has also been steadily increasing, has reached truly astonishing numbers and is consequently shaping the country and further sustaining the residential demand. The Luxembourg population pyramid and the statistics published by STATEC keep showing that the growth of the Luxembourg market is keeping pace with demographic growth. A large part of this demographic growth is supported by foreign workers settling in Luxembourg. This trend is expected to continue, reaching around 700,000 between 2025 and 2030.
As much as traditional factors have sustained this equilibrium, new influences must not only be considered but actively built in into solutions.
It is about anticipating new habits
Living and working habits that were already beginning to appear in society were dramatically accelerated due to the recent pandemic. Historically, the demand for housing in Luxembourg has been linked to working location and activity, resulting Luxembourg City being the first choice of living. As home-office became the new normal, a shift towards the countryside due to the prioritization of owning outside space such as terraces, balconies and being close to the nature along with larger living space has been seen.
With this geographical diversification, and with larger housing surface areas being limited and expensive in the capital, developers and investors were quick in adapting and leveraging this newly arising opportunity by developing housing areas and corresponding infrastructure in the outskirts.
The spatial planning strategy implemented by the PDAT (Programme Directeur d’Amenagement du Territoire) and the Luxembourg government in 2003, almost 20 years ago, has never been more pertinent. Its aim was to redistribute the population by boosting the development plans of other satellite cities like Junglinster, Mersch or Dudelange considered new regional centres. The focus was stronger on cities such as Esch-sur-Alzette and Ettelbruck, the results of which can be seen today. Other developments in the government's target cities are now beginning to become visible such as the development of Gravity in the city of Differdange.
Incentivizing continued returns
The result of increasing prices, not only continuing in Luxembourg city but also in surrounding municipalities – however at different levels, offer investors a great return. As long as the increase of sell-prices stabilize instead of spiking up in short period of times, the attractiveness will be retained and manageable. However, current rising interest rates and shortage of building materials and supplies, due to geopolitical impacts already put some tension and risk on purchasing. Single-family homes and expensive city apartments in prime location are particularly impacted, which could possibly lead to discouraging the appetite for home buying in favour of the renting instead.
Within the capital city and with regards to the diversification of typologies, alternative solutions need to fulfil the rising demand for rental apartments for the growing number of international workforces coming to Luxembourg each year. Those expats and young workers prefer the city to connect with peers and be close to work. New forms of housing like co-living options have entered the market already and additional projects are expected to be launched in the short term.
Consequently, we are observing both a geographical diversification and a diversification in the type of housing demanded in the market.
To meet the increased demand in the market, several initiatives are being proposed and initiated on government level. For example, to encourage and to speed up the development of land that is already zoned for development. In his eight State of the Nation speech last October 2021, Luxembourg’s Prime Minister Xavier Bettel announced the implementation of a property tax reform within the year 2022 that aims to tax undeveloped land that could be used for housing.
Residential assets have proven their resilience and as a positive effect, investors are turning more towards this market segment as opposed to other assets with significant exposure as offices, retail and Horeca. Real estate developers and investment funds will have a crucial role to play when it comes to investing in new real estate developments in locations that are not so prime, but which are expected to become satellite cities well connected to Luxembourg City, which for the time being will continue to be the driver of growth as the financial and business heart of the country.
David Syenave, Partner, M&A Real Estate at EY Luxembourg, comments: “In the Real Estate Strategy & Transactions team at EY Luxembourg we identified that the residential market is expected to play a larger role in the Real Estate sector going forward. Therefore, we provide a comprehensive service offering to Real Estate investors including Valuations, Transaction support and Development Advisory. Through our expertise and market knowledge, we are able to follow-up on residential developments securing the investment from a cost and planning perspective while monitoring technical aspects”.