Real estate remains a good investment opportunity. (Wort)

In combination with the European debt crisis many people have started searching for good investment opportunities with real estate properties having turned into one of the most preferred options. After prices had decreased in 2009, things got back to their usual standards starting from late 2010. As per the stats provided by the Central Bank, prices for real estate properties have increased by 5.1% over the past three years (2008-2011).

“It definitely makes sense to invest in real estate” proudly says Jean-Paul Scheuren, chairman of the Real Estate Chamber of the Grand Duchy of Luxembourg. “Since 50 years real estate properties are one of the safest investment opportunities in Luxembourg” he adds, “even though the latest trends are less impressive than those registered from 1992 through 2009”. The investment in real estate remains more profitable than any saving account whose interest rate stands at less than 1%. “Even without deduction of VAT, still real estate stands out as a good business” stresses Scheuren. The investor may deduct, over a span of seven years, around 6% of the money that is paid to buy an apartment, while once this period has elapsed, the deduction decreases to 2%. If the property is rented, people can easily generate good revenues without having to pay too many taxes. Investors contribute for 30 up to 50% of the transaction for new apartments.

“These are mostly individuals” says Scheuren. In most cases it is about people of a certain age who have already paid back the loans they got for their house and are searching for a safe way to invest the extra money at their disposal. Investments in single-family houses are less common. 

Scheuren rules out that this profile may entail – as BGL chairman Yves Mersch had somehow feared a couple of years ago – a speculative bubble. “Such a bubble may be only generated by the long procedures we apply here” he warns. All other data and factors actually speak against the existence of a speculative bubble. We shall first pay attention to the profile of the people these properties are being built for. “70% of the population own its home”, which means a good share of these real estate units remain in the hands of those who live there.  

Additionally, the majority of these apartments are being sold even before their construction is completed. This is totally different in countries, like Spain for instance, that are currently hit by the crisis, where real estate properties were built for future customers that eventually did not show up. The consequence is quite clear: the buildings remained empty and prices have fallen dramatically. “Such a development is almost impossible here in Luxembourg” says Scheuren. The local banks ask for guarantees from their customers and all units that are constructed in Luxembourg fulfill the needs of the market. Additionally, the profile of those buyers is quite sustainable: “They normally buy these apartments by already contributing 50% of the price with their own means” adds Scheuren. A speculative bubble seems unlikely also if you compare prices and the purchasing power of the local population, something testifying that these properties are indeed not too expensive.

“Nevertheless we do need a statistical tool whereby we can predict and evaluate the rise of a speculative bubble” stresses Scheuren. This is not yet available and there are actually too many stats – especially for one-family houses – that stem from announced prices which do not necessarily correspond to those whereby the transactions are finally sealed. “This evidently boosts price increases”. Owners also want to enjoy maximum profit if they sell a property, even if this is far away from being a first-class real estate. “It is no wonder that some 5’000 houses remain unsold here in Luxembourg because many are too expensive and hence they do not find any customer”. The offer is abundant enough, says Scheuren, and this wasn’t always the case. This applies also to apartments. “We have had a lack of apartments available for sale for some 10 years but this is no longer the case”. Who wants to invest in brand-new properties shall nevertheless be extremely careful. “The difference is made by small details”. If you invest in an old building, you shall always have somebody at your side that has a good knowledge of real estate and its functioning.

Those who want to rent an apartment enjoy the greatest opportunities in urban areas.

“The property does not have to be necessarily situated next to the capital city; similar opportunities exist also in Esch-sur-Alzette and Ettelbruck” stresses Scheuren. Luxembourg City remains as usual the most expensive neighborhood of the Grand Duchy, as prices stand at 5’301 € per sq. m. versus an average of 4’115 € for the country as a whole. Prices have risen by 2.27 and 5.31% for already existing and new apartments respectively in the second trimester of the current year. If you search for the trends year over year, the increase stands at 4.34 and 6.69% while the average size of the units being sold has fallen. Trends are very encouraging for single-family houses whose sales have increased – in the second quarter of this year – by 31.7% in comparison with the period going from January through March 2012. This means a total of 822 houses were sold in the Grand Duchy since April through June 2012. As for loans and their duration, the average is comprised between 25 and 30 years with the majority of the customers opting for a fixed-rate loan.