Luxembourg and real estate

Analysis - 10/25/2016

The dynamism of the Luxembourg real estate market is supported by an attractive, stable economy, and by wealth management expertise unique in Europe. Catherine Roux-Sevelle, Head of Wealth Solutions Edmond de Rothschild (Europe)

The Luxembourg real estate market is booming thanks to the country’s good economic health. Its growth is enviable compared with its European neighbours and the rating agencies continue to give it the highest possible rating (Triple A).

Thanks to its stability, flexibility and insatiable appetite for growth, Luxembourg has emerged more or less unscathed from recent financial crises. It is currently diversifying its economy by betting on expanding sectors: Fintechs, logistics, e-commerce, the development of clusters (local business incubators) and even space mining.

Its strategic location at the heart of Europe, its openness and its multilingualism help Luxembourg position itself as a true centre of the European Union.

Key player

Despite being a small country, Luxembourg is a key player and has developed excellent trade relations not only within Europe, but also with many distant regions, as can be seen from its flourishing trade with other countries, such as China.

For its part, the financial centre has developed an expertise that is unique in Europe, by meeting the needs of international investors and by adopting a transparent economic and political strategy. The country therefore continues to attract growing numbers of skilled workers every year. In thirty years, Luxembourg’s population has increased from 370,000 to almost 550,000 inhabitants.

100,000 new inhabitants within the next 10 years

At the current time, real estate demand largely outstrips supply and this situation is likely to continue for quite some time, bearing in mind that the country expects to welcome 100,000 new inhabitants over the next ten years.

As a result, residential property prices continue to rise significantly. The financial sector’s growth attracts high-level executives wanting luxury accommodation, mostly in the city centre.

This dynamism of the real estate sector is supported by an attractive tax system for individuals that want to diversify their assets by investing in residential property. Today, buy-to-let investments account for 60% of new residential property built in the city of Luxembourg.

Attractive product

The people of Luxembourg traditionally invest in real estate and, in particular, they can deduct home mortgage interest payments from their taxable income. Thanks to the tax deductions allowed in Luxembourg, real estate is a truly attractive investment product in a context where rental supply is below demand.

The commercial real estate sector is also booming, with a low vacancy rate and attractive returns. International investors have been increasingly active in this sector in recent years.

Recognised platform

In this context, the Luxembourg market has established an internationally recognised platform for real estate ownership vehicles. Whether for structuring real estate funds or corporate vehicles, the Grand Duchy has established itself as a leading player in structuring investment vehicles thanks to its dynamism, flexibility and ability to rapidly transpose and implement new European directives.

As a result, the Luxemburg market is now the leading European domicile for vehicles investing in real estate internationally.

These structuring operations cover not only real estate located in Luxembourg, but also international real estate ownership. Boosted by its network of double tax treaties, Luxembourg attracts investors from many countries, looking for long-term investment vehicles that are recognised by their country of residence.

Which vehicles cater for real estate investments in Luxembourg?

A real estate investment vehicle in Luxembourg may take the form of a non-regulated entity, a Luxembourg public limited company, or a regulated entity such as an undertaking for collective investment (UCI), supervised by the Luxembourg regulator, the Commission de surveillance du secteur financier (the CSSF).

The choice of vehicle depends on the amount of the planned investments, the country of residence of the investors, the means of financing chosen or the reporting needs of investors in respect of such investments.

Today, the country has more than EUR 39 billion in assets invested in real estate compared with only 3.3 billion in 2006.

The Luxembourg market is also very dynamic in the area of the establishment and domiciliation of real estate funds. Since the introduction of the AIFMD (Alternative Investment Fund Managers Directive), the number of international investment funds set up in Luxembourg has increased significantly. Today, the country has more than EUR 39 billion in assets invested in real estate compared with only 3.3 billion in 2006.

Specialised investment funds

This strong growth is mainly due to the success of the flexible regulatory framework offered by the law of 13 February 2007 on specialised investment funds (SIF).

Its flexible legal framework and attractive tax regime for non-residents (no withholding tax on distributions) facilitate the construction of bespoke vehicles.

The legal and fiscal environment accommodates the requirements of the countries in which the Luxembourg real estate funds invest, while offering investors a regulated framework supervised by the CSSF. Investors that invest via a fund also receive sophisticated valuation reports on the real estate targets. The funds are usually set up by institutional investors, Family Offices or very wealthy individuals since the amount invested needs to be significant in order for the investment to be cost-effective given the costs involved in the creation and domiciliation of such funds.

It is also possible to invest in real estate via a simple Luxembourg holding company (Soparfi). These companies, which are fully taxable in Luxembourg, benefit from double tax treaties and are eligible for the parent/subsidiary regime. This type of structure is generally chosen when private investors want to co-invest in smaller real estate targets (club deals). The use of non-regulated vehicles provides foreign investors with a flexible investment vehicle, which optimises reinvestment.