What is the status of the European real estate market?

The European real estate sector has been under high pressure and still faces strong economic headwinds which are the result of high inflation and severe ECB-policy driven interest rate hikes applied with an unprecedented speed over a short period of time. It is therefore no surprise that the European real estate market has endured a record low in number of transactions during the last 18 months. This is in essence due to the fact that real estate market participants adopted a typical initial “wait-and-see” approach considering (i) the price of debt, (ii) the perceived discrepancies between sellers and buyers regarding valuation of assets, (iii) the increased construction costs and (iv) the enhanced default risks under financing arrangements. It is quite clear, according to Dr. Stefan Feuerriegel, that interest rates, inflation (and the ensuing impact on construction costs), European economic growth and global economic growth remain some of the key factors which will influence real estate market participants’ investment decisions in the coming years. After the initial shock which resulted in increasing numbers of insolvencies, especially of developers, the “wait-and-see” approach is not working for a number of participants and hence the markets begin to move.

What is the status of the Luxembourg real estate market?

The Luxembourg real estate market has not differed from the European real estate market in that respect. As an example, between Q2 of 2022 and Q2 of 2023 the number of transactions for apartments purchased “off-plan” (“ventes en état futur d’achèvement”) and the financial volume of transactions decreased according to Statec by 63.2% and 63.5% respectively. Such decrease in transactional volume is a testimony to the tightened economic reality resulting from the interest hikes which in turn are having knock-on effects on prospective buyers of Luxembourg real estate which are that (i) investment in the real estate sector is becoming far less profitable for investors, (ii) buyers reliant on debt financing have less financial capacity to acquire real estate assets, (iii) Luxembourg banks are more often than not leaning towards not granting “bridge loans” to prospective buyers anymore and becoming more selective as regards the assets they are willing to finance, factoring in energy classification and increasing (a) costs of renovation, (b) delays in constructing/renovating, (c) default risks of real estate market participants such as project developers, construction companies and subcontractors and (d) uncertainties regarding the final price of apartments purchased “off-plan”.

What are the “hot” assets still making the cut for real estate players?

Luxembourg is a tiny but strategically important country for investors for it is a preferred hub for the structuring of some of the most coveted real estate transactions in the whole of Europe. World-renowned asset managers and project developers for instance very often team up for sizeable joint ventures with a view to building logistics centres, warehouses or data centres in the whole of Europe (and there is a perceived strong appetite for Eastern Europe). At the same time, we are currently witnessing an increasing appetite from owners of huge portfolios of residential units to sell these off which may, if we are cautiously optimistic, be interpreted as an indicator for a slow recovery of the real estate market. The interest in transactions in the sphere of commercial real estate, in general, and office space, in particular, seems to be fading. The new working reality of more home office also leads to a trend – starting in the US – of an increase in office space vacancies and in the disposition by some investors of office buildings, especially those which are no longer ESG compliant anymore. There are, however, a few exceptions involving “trophy” assets in prime locations (such as London).

What is the outlook for the real estate market?

Although the European real estate markets recorded during the last 18 months a very low number of transactions, the current turbulent economic environment seems to present several opportunities which are ripe for picking. On the one hand, prospective buyers will be looking at distressed scenarios, although we feel that they first may want to get a better view on the expected evolution of interest rates, construction costs and economic growth in Europe. On the other hand, opportunistic investors are raising capital and are looking out for higher yield opportunities. In Luxembourg the newly elected Government has announced a structural stimulus package of incentivising measures aimed at revitalising the local real estate market. On the European level it is fair to say that, due to the diversity of Europe’s real estate markets, there is unlikely to be a single timeline for recovery.

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