Real Estate Capital Gains Outlook in Luxembourg in the Negative
Rudolphe ABEN
The dynamics of the Luxembourg real estate market have undergone a radical shift in recent years. While the period from 2018 to 2022 was marked by a spectacular rise in prices, the trend reversed in 2023 due to rising interest rates. This turnaround has weakened the profitability of rental investments and forced investors to rethink their strategies.
📉 A Market Reversal After a Period of Strong Growth
Between 2018 and 2022, real estate prices in Luxembourg experienced impressive growth, peaking at +15% at the end of 2020. This surge was driven by favorable credit conditions, strong demand, and limited supply. However, the interest rate hikes initiated in 2022 put an end to this expansion.
Apartment prices have since fallen by approximately 15.7% between Q3 2022 and Q4 2023. This correction has partially offset the loss of purchasing power caused by the rising cost of mortgage loans, but it has also made rental investment less attractive.
đź“Š Declining Rental Profitability
The real estate market has traditionally been attractive due to its stable rental yield. Between 2010 and 2018, the gross rental yield fluctuated between 4.26% and 4.56%. However, with the surge in housing prices until 2022, this yield dropped to 3.04%.
In 2023, a slight correction allowed the gross rental yield to rise to 3.74%, and it is expected to continue approaching the 2010-2018 levels by 2024. However, this apparent improvement does not compensate for the decline in capital gains prospects.
The net rental yield, which factors in financing costs, taxation, and market price trends, turned negative at the end of 2022 or in 2023. This situation is leading many investors to reassess their strategies, with some preferring to wait for better conditions, while others turn to more profitable alternative investments.
📉 Growing Disinterest in Rental Investment
With a negative net yield, rental investment becomes less attractive. Additionally, other asset classes, particularly bonds, have regained appeal due to rising interest rates.
In this context, several trends are emerging:
âś… A decline in the number of investor buyers, who prefer to wait for market stabilization.
âś… Increased pressure on housing prices, as sellers adjust expectations to find buyers.
âś… A rental market that remains tight, but with lower profitability than in previous years.
🏡 Future Scenarios?
The Luxembourg real estate market is entering a phase of adjustment. While price declines help rebalance supply and demand, they also lead to a depreciation of capital gains prospects, making real estate investment less lucrative in the short term.
Two key factors will determine the future outlook:
đź“Ś Interest rate trends: A stabilization or reduction in rates could restore buyer confidence and revive demand.
đź“Ś Fiscal and regulatory policies: Incentive measures could boost the rental market and attract new investors.
đź“Ś A Market in Transformation
The Luxembourg real estate market is experiencing a profound transformation, with an erosion of capital gains prospects and weakened rental profitability. For investors, caution and adaptability are key. Some will choose to wait for better market conditions, while others will seek more profitable short-term alternatives.
đź’ˇ Real estate investment remains a strategic choice, but it now requires a more thorough analysis and adaptation to the new market realities.