Recently described as the "European Eldorado" of real estate investments, Luxembourg attracts alternative investment funds seeking a stable political and economic environment and attractive capital growth prospects. In this panorama, some players have identified innovative opportunities to accompany flagship European projects.
Luxembourg never ceases to amaze its neighbors with its dynamism. At a time when others are experiencing social unrest and political and economic uncertainty, the Grand Duchy is displaying a bright mine between growth and innovation. Previously discreet, it is now attracting the interest of major brands from neighboring countries.
Many economic players, particularly French, have pointed out the Grand Duchy as a prime location on the map. Thus, at the end of last year, the pedestrian streets of downtown Luxembourg witnessed the opening of the flagship multi-brand Galeries Lafayette from France. To accompany them in the sumptuous building of the brand new Royal Hamilius, the FNAC and Décathlon also set up shop in the country for the first time.
In January, the French magazine Challenges looked at the boom in this country that "never stops growing". Citing among its sources the Statec, the city of Luxembourg, the IMF and Luxembourg for Finance, it highlighted the country's good results. The country now has more than 119,000 inhabitants in the capital (nearly 614,000 throughout the Grand Duchy), an increase of 30% in ten years. It has posted an annual GDP growth of 3% per year since 2013, a transitional unemployment rate of only 5.3% equivalent to almost full employment, and finally welcomes the relocation of 58 financial institutions since the referendum on Brexit. With a surplus migration balance every year, Luxembourg is characterized by a structural shortage of new housing. Naturally, this deficit supports a growth in prices per square meter, which is interesting from an investment perspective.
Attractive investment prospects
Many real estate investment funds have understood this and many are now launching into the country, supporting development in housing, office and commercial structures, as well as infrastructure. Indeed, this momentum has never been so strong in this region whose landscape is changing day by day to better accommodate and satisfy its increasingly numerous and demanding inhabitants. Working, for the most part, in the service, finance or new technology sectors, the workforce is demanding mobility, technological equipment and services of all kinds, mainly in the areas of comfort, leisure and health. Enjoying one of the highest purchasing power in Europe, they are unquestionably among the leading consumers and thus fuel the dynamism of the economy.Nevertheless, as the landscape with its many construction sites and construction machinery for the numerous infrastructure projects shows, the country is still in a state of flux. Consequently, the analysis is no longer focused solely on Luxembourg City, which used to be a strategic center concentrating most of the activity. In this nerve center, the prices per square meter of housing and commercial premises are peaking, thus limiting their potential for capital growth.
Thinking Outside the City
All this would not be really pleasing from an investment perspective if there was no possibility to think "out of the box", or rather, here, out of the city. Now the agglomeration is expanding. Infrastructure is accompanying its sprawling development, and the frenzy has indeed spread to other cities in the Grand Duchy, previously considered secondary. Mobility is the first watchword and is accompanied by concrete improvements. The tramway, a reliable, ecological and low-polluting solution, is intended to solve a number of intramural traffic problems, while train lines linking the north to the south and west of the country now provide smoother communications for those who want to avoid traffic jams. Large shopping malls and smaller supermarkets are emerging, encouraged by the demographic boom, itself reinforced by the exodus of financial institutions from across the Channel. However, not all regions are equally well placed to benefit from this growth and significant improvement in infrastructure and mobility. These disparities are reflected in the changes in the price per square meter of new housing as much as in the price per square meter of existing housing.The Alzette Valley and the South, a European development hub
The best development prospects within the metropolis of Luxembourg are in the South and in the Esch-sur-Alzette basin. After the transfer of the "Gabriel Lippmann" Research Centre, the advent of the Belval shopping center, the establishment of the UNI University close to the famous Rockhal auditorium, the pull of the financial institutions which had the flair to establish themselves right from the start, such as Royal Bank of Canada (RBC Treasury & Financial Services) or Pictet Technology and innovation-driven institutions such as LuxInnovation, it is now the turn of the very buoyant healthcare sector to benefit from major investments in this area, with the construction of a university hospital, the future Südspidol. It should be noted that this boom in the Esch region did not come about by chance.
Indeed, Esch is one of the flagship urban development projects selected on a European scale and, as such, is benefiting from significant investments to support this boom. This is the initiative of Agora, a national project resulting from a public-private partnership between the Luxembourg State and the ArcelorMittal group (formerly Arbed), and founded at the end of 2000 with the aim of rehabilitating the former iron and steel sites in the south of Luxembourg.
Starting from a price per square meter well below that of Luxembourg City, Esch-Sur-Alzette and its surroundings nevertheless offer attractive prospects for capital growth. Unik Capital Solutions has been well aware of this attraction, even anticipating it since the launch of its various real estate investment solutions in 2018, including Unik Fund (real estate development and property trading). The company's experts, whose investment decisions are the result of meticulous analysis based on more than twenty years of experience in real estate, have explored the region's assets in depth.
Drive development through a 360° analysis strategy from Unik Capital Solutions
The Unik Fund solution, for its investments in the Grand Duchy, has naturally favored future locations, in order to seek, through the different projects, a capital growth higher than that expected in already mature areas. The city of Luxembourg, a historic real estate attraction and development point, is expanding at a sustained pace. Other particularly dynamic areas are thus enabling home ownership at lower prices than those in the city center. Naturally, the Alzette valley is being studied.At the center of the analyses, Unik Capital Solutions takes into consideration all development phenomena. Based in Luxembourg, its analysts are very attentive to the slightest market developments, study investment transfers and draw up several dossiers that meet these estimates and forecasts. These are studies over several years, allowing Unik Capital Solutions to see that their previous anticipations have been confirmed. Currently, the development that had affected Gasperich in the late 2010 seems to extend to the Esch region. The first axis of study is the real estate market, but it is far from being the only one. The team also analyses in depth the behaviour of final purchasers of real estate, over several consecutive years. They either wish to be close to their place of work, or outside the city for more affordable home ownership prices, while maintaining increased mobility and reducing the constraints associated with commuting to and from work.
"Taking into account the behavior and expectations of final buyers is essential," stresses Sylvie Proia, Partner and Co-CEO of Unik Capital Solutions, "because a development project without a final buyer has no chance of success. The final buyer is the ultimate goal of any real estate investment project. First of all, the portrait of the real estate buyer in Luxembourg is very favorable to the dynamism of the market. With the highest assets per adult person in Europe with more than four hundred and thirty thousand euros and the highest average salary among the thirty-five OECD countries, he also benefits from easy financing conditions, since the five main banks of the Place grant more than 90% of the requests for real estate loans. Therefore, what is essential to seduce this future owner is to ensure easy access to his workplace, avoiding saturated highways and the associated drudgery. As most of the buyers are tertiary and financial employees working in Luxembourg city, the Esch valley is of great interest as it offers very efficient rail infrastructures to get to the city center".
A careful risk analysis that generates confidence
Each project is subject to a global analysis. This is not limited to a study purely focused on the real estate market. The team of analysts covers in depth the value chain from construction to sale: it examines the behaviour of the final buyers along these two axes: their financial capacity and the characteristics of the most sought-after properties. These analyses are at the heart of Unik Capital Solutions' risk management. They enable us to gain a comprehensive understanding of each transaction and to anticipate developments up to the forward resale of the assets.Of course, the development of projects also takes into account a complete evaluation of the risk linked to a possible speculative bubble on the price per square meter of real estate in Luxembourg. Apart from the downturn in 2009, prices have in fact been rising steadily for thirty years, often by more than 4% annually in recent years. "As analysts", says Sylvie Proia and her team, "we believe that in a mature market such as the city center, there are greater risks of forward price corrections than in growing areas. However, a real estate speculative bubble is only created when developers create space without having the corresponding demand on the other side. As long as the market absorbs supply, demand remains in excess and as long as interest rates do not rise, there is no risk of a speculative bubble. This is exactly the case in Luxembourg, where the demand for new housing always remains far greater than the supply". It is the consistency and accuracy of the analyses that fuel the confidence of their investors. Today, all the parameters of development have been gathered and the confidence of investors allows them to accompany large-scale projects as they go along.
Currently, Unik Capital Solutions has chosen to develop, through its various real estate investment solutions, several projects of significant size. Constantly observing the market and its prospects, the investment team is pleased to have targeted, in particular, the south of Luxembourg to be part of its development. It has thus positioned itself as a major player in real estate investment in Luxembourg.
Sources: Challenges.fr January 2020; Statec 2018-2019; Bank for International Settlements (BIS) and Statec in a joint BIL / PwC study of May 2019 based on announced prices; https://www.belval.lu/fr/belval/histoire/; EuroStat/ ECB; Fondation-Idea.lu..
By Christophe KADI, Chief Operating Officer, Unik Capital Solutions