Engel & Völkers: Optimistic Outlook for Luxembourg Real Estate Market in 2022

Engel & Völkers, a leading service company specialised in the brokerage of premium residential property, commercial real estate, yachts and aircrafts, has published a report looking back at the residential real estate market in 2021 and the market outlook for 2022.

As for most sectors, the COVID-19 pandemic had a major influence on the Luxembourgish residential real estate market. In its report, Engel & Völkers said it had noticed a change in behaviour on both the buyer and seller sides due to a lack of available properties for sale.

According to this report, the pandemic, paired with further external factors like the inflation discussion, rising prices for renovations and construction, strongly influenced the market. Many sales decisions were postponed because of these uncertainties. This was reflected in the fact that there were 10% fewer listings on the Immotop.lu real estate advertising platform in the first quarter of 2021. The market's demand for residential properties stayed at a very high level. This mix of fewer products on the market and very high demand pushed average prices not only in the top locations but across the Gand Duchy to new peaks.

The report added that, for years, the prices in Luxembourg have been rising signficantly, much like in the top locations in neighbouring markets like Germany, Belgium or France. These higher prices are attributed to several factors: historically low interest rates, money that is cheaper than ever before, growing inflation and people looking for safe investment of their funds in the mid and long term.

Raymond Klein, Team Leader at Engel & Völkers Luxembourg, said he sees a: “good economic development - especially in the service orientated businesses in which Luxembourg is very strong, for example demographic growth and high creation of strongly qualified jobs. For 2022, we see an ongoing inflation and in comparison with penalty interest on big cash assets and less promising investment opportunities the real estate market will automatically get more and more attractive as an investment alternative as an apparent safe harbour”.

The COVID-19 pandemic with its associated lockdowns and other consequences pushed the trend of buyers for more outdoor space. Since many people cannot pay for this extra space in the capital, Engel & Völkers Luxembourg noticed stronger demand for houses and apartments in the surrounding areas of Luxembourg City. This trend is also expected to continue in 2022 as many people are able to work from home and therefore put less importance on living close to their workplace.

According to Engel & Völkers, the rental market suffered greatly in 2020 and 2021 due to the effect of remote working and the fact that fewer new potential tenants were obliged to move to Luxembourg. The Luxembourg management team said that they were convinced that 2022 would bring more normality to the market as a large percentage of the population is vaccinated against COVID-19 and moving from abroad to Luxembourg is becoming easier.

The new development market in Luxembourg has also been struggling since 2020. Despite strong growth rates among the Luxembourgish population and more need for living space, the administrative regulations for new developments have become increasingly complicated in recent years. The cost for construction materials exploded in the past year and raised the risk for real estate developers enormously. According to the report, with prices for land at an all time high, developers can not allow any negotiations on sales prices. Consequently, the prices of new constructions rose above average and the margins of developers dropped.

Moreover, shortages and higher prices for construction materials are now often delaying projects and increasing the risk for buyers. As such, many potential buyers of new developments are waiting on the sidelines or opting for a resale property as an alternative. The report added that the Luxembourg Government had lowered the percentage of amortisation from 6% to 5% yearly and from six to five years which makes investment in new developments less attractive. A few years ago, Engel & Völkers often saw 40% of residential buildings being sold to investors. This percentage has dropped to about 36%. The report attributed this development in part to the fact that the CSSF has made it more difficult for investors to get financing. Since 2021, banks in Luxembourg are supposed to ask the buyer for at least 20% personal contribution on the purchase price including fees.

“When looking at the statistics from the STATEC - Observatoire de l’habitat, our analysis is confirmed”, said Matthias May, Managing Director of Engel & Völkers. “In 2021, we see a decrease of 40% on the number of sales of VEFA apartments compared to 2020".

Nevertheless, investment in a new development remains very attractive with its high growth rates of general property prices in Luxembourg. Engel & Völkers said it saw that the current development brought the prices of new developments and resale properties a little bit closer together as the prices of resale properties were growing rapidly. Demand is below the level of 2019 but remains very high. 

For the first time, the locality of Bertrange climbed to the top of the highest average prices for new building properties with an average price of €12,500. Luxembourg City followed, with an average price of €12,000.

Philipp Niemann, Managing Director of Engel & Völkers Luxembourg, commented: “All in all, the Luxembourgish real estate market for new build or existing properties is a very healthy one. High demand meets a small amount of products which will keep on raising the prices also in 2022. The rental market struggled during the pandemic but we are expecting a much higher demand from April on, especially from the UK and other regions. The new development market will slowly recover and will offer good investment opportunities. From seller and buyer perspective a good price valuation is more important than ever before, because the price differences within micro locations and different kinds of property types differ enormously".