“The Luxembourg real estate market is behaving very resiliently”
What is your analysis of the current Luxembourg real estate market?
Pierre Beissel
. – “The Luxembourg real estate market is behaving very resiliently in the face of the current crisis, and in particular in the face of the increase in interest rates. Compared to 2021, a slowdown is certainly visible. However, demand remains strong enough for the time being to mitigate a drop in prices. This demand is undoubtedly due to the continuous economic development of the country, and in particular the development of the investment fund industry, which requires substantial human resources and creates a need for resources for all the derivative sectors, namely the ancillary services linked or not linked to industry. Logically, the additional human resources settling in Luxembourg will need housing, thereby supporting demand in the residential sector. At present, the Luxembourg market is therefore a market driven by demand rather than speculation, although some speculation cannot be denied. Barring a very substantial rise in interest rates or a major structural problem for the Luxembourg fund industry, one might think that a fall in prices is currently unlikely and that the market remains a seller’s market rather than a buyer’s market.
How do you anticipate the impact of changes in interest rates on the real estate market?
“It would be an illusion to believe that the increase in interest rates would have no effect on the real estate market. In short, the cost of acquiring real estate will be higher, regardless of the sub-asset class. In residential, certain categories of people will no longer have access to real estate ownership. This poses a problem in a Luxembourg market where access to property was already difficult before. The duration of loans for the acquisition of residential real estate should be extended in order to allow the acquisition of real estate for certain people. Given the significant real estate demand in Luxembourg, it is however not certain that the increase in rates will have a lasting effect on real estate prices, except for a very substantial increase in these rates, which currently seems unlikely in Europe, subject of course to extreme and prolonged inflation. In the office real estate market, we will certainly see an initial drop in demand leading, after a certain period of adaptation, an adjustment of prices. It is however possible that a number of buyers will seek to tie up their acquisition quickly before a subsequent increase in interest rates. In terms of value adjustment, the real estate most at risk will, as usual, be that located in outlying areas.
How do you judge the resilience and future prospects of real estate investment funds in Luxembourg?
“Luxembourg is establishing itself more than ever as the center of excellence for investment funds, and in particular for alternative investment funds such as real estate funds. The legal, tax and regulatory infrastructure remains attractive and remains so, provided that the current framework is maintained and further developed. The mass of assets under management by real estate funds has not ceased to increase, including during the pandemic period. Despite the economic uncertainties currently existing in the short term, the medium and long term development prospects remain promising. The asset class as such should see some downturn, but should hold up better than other illiquid asset classes, given that real estate remains a safe haven in times of crisis, and especially in the event of high inflation. This is partly because it is unlikely that other emerging asset classes in the near future and liquid asset classes will be as, if not more, susceptible to the current housing crisis. Given these prospects for the development of the asset class and the positioning of Luxembourg, the future of Luxembourg real estate investment funds seems, if not bright, at least very positive.”