4th June 2018

The Luxembourg Real Estate Market: rental investment

BCEE is market leader for residential real estate loans in Luxembourg. We spoke with Dr. Daniel Mack, Vice President of Credit Process Management, who is in charge, among others, of developing statistical models for the field, and asked him to give us an overview of the latest developments in the real estate market.

Is investing in the real estate market today recommended given the high prices?

The answer to that question depends on several factors, particularly on the investor’s profile. Traditional savings having lost their appeal because of interest rates close to 0%, customers want more profitable investments. As such, some customers choose to constitute a somewhat higher risk and more diverse securities portfolio, while others prefer to invest in rental real estate with an attractive borrowing rate loan.

Contrary to market rates, which have considerably gone down since the 2008 economic crisis, the return on real estate investments has not decreased over the last years. For example, a studio in the city centre of Luxembourg, which costs 300.000 euros can typically be rented for about 12.000 euros per year, excluding expenses, which translates to an annual return of 4%.

What are the advantages and disadvantages of investing in real estate?

First, the rent is an additional source of income and therefore clearly an advantage. Often the rent will first be used to repay a loan and thus contributes to wealth creation. In the future, the building could be used for the owner’s own purposes or as housing for adult children.

When acquiring new real estate destined for rental purposes, the tax benefits are quite interesting, with the possibility of accelerated depreciation in the first few years.
Dr Daniel Mack - Credit Process Management

As a disadvantage, we need to mention rental risk, such as the residence remaining vacant for a prolonged period after a change in lessee. Furthermore, real estate management requires a certain amount of personal investment and considerable management and maintenance costs. Last, the investor is exposed to real estate market risks on both the national and local level.

What is the real estate market risk?

The risk would be a depreciation of the market value of a building in case of sale. While it is difficult to predict future price trends, we draw from observations from previous years and on recent scientific studies to assess this risk.

The increase in real estate prices is not a recent phenomenon. If we look at long term trends, nominal prices for the Grand Duchy have increased on average by 6.9% per year from 1974 to 2016. This means that on average a building today costs 17 times more than in 1974. Between 2009 and 2017, the average yearly increase was of 4.6%, which is equivalent to a price increase of more than 50% in nine years. In France and Belgium, the increase in actual prices was only 10% and 20% for the same period. In Germany, there was an increase of about 30% [[1]].



[1] Source: EUROSTAT (2015-2017)