One might have thought Luxembourg’s real estate market was doing well compared to other European cities, but for a long time, exact comparative numbers weren’t available. That’s all changed with the release of a new property index covering Luxembourg, the result of an 18-month long labour-intensive and expensive project.
The MSCI Luxembourg Annual Property Index is the latest addition to the MSCI Real Assets group. It was prepared with the accounting firm EY and LuxReal, a platform connecting real estate professionals nationally and internationally in Luxembourg. It shows that Luxembourg commercial real estate has an annualised performance of 7.9 percent over the past five years, and one of the lowest vacancy rates in Europe.
The Luxembourg index data was first included in MSCI’s global and European indexes in April 2022 but only publicly analysed and presented this week. The index tracks the performance of 34 property investments, with a total capital value of 2.0 billion euros as of December 2021. That’s a mere fraction of the 131 billion euro in total assets held by Luxembourg-domiciled real estate funds that invest internationally, as reported for the end of the third quarter.
Life-time subscription
At the presentation of the new index, David Syenave, a partner in “M&A” real estate at EY Luxembourg, said developing it took almost two years as well as collaboration with real estate firms such as Inowai. “Today, after 18 months of work we are getting the initial benefits, especially at MSCI who I hope will take out a life-time subscription to use the platform,” he joked to general laughter in the very well-attended event last Wednesday.
Esthel Lougrat, head of real estate/private market sales at MSCI, explained that income return for commercial property is “actually declining from year to year,” she said. “It’s the capital growth obviously which is making the volatility on the total return.”
Looking at Luxembourg city’s performance against other European capitals, it comes in 7th, with a score of 7.6, just behind Brussels at 8.0 but ahead of Paris at 6.7.
According to a 2022 CBRE report, 1.578 billion euro was invested in Luxembourg CRE in 2021, in line with the year previous. Expected take-up (new occupancy) was expected to be over 250,000m2.
Comparability
Laurent Ternisien, CEO for Luxembourg and chief client officer in investment management at real estate investment advisor BNP Paribas Reim, said the index added harmonisation to the data published by the sector. “When we publish total return data on the market, it’s extremely important to make sure they are comparable,” he said.
The index also improves transparency. “We all know that when a market is opaque, in terms of consequences on the price,” Ternisien said, adding that it would also make it possible to benchmark real estate against other asset classes. “We are in competition with bonds. We are in competition with equity.”
Suzy Denys, country manager at Patrizia AG, pointed out that “transparency leads to liquidity.” This is especially true on the Luxembourg market, she said, where 78 percent of the demand for offices is for small units of under 500 square metres.
Diversification coming
While Luxembourg commercial real estate is currently dominated by office buildings, Ternisien pointed out that over time there will be more diversification to other asset classes such as logistics and residential.
The new index comes out at a time when the economy is affected by inflation and increasing interest rates. Marc Baertz, a partner and chief financial officer as well as head of valuation at Inowai, said that a drop in valuations is baked in for the year-end.
MSCI also covers Luxembourg through its Pan-European Property Fund Index, known as Pepfi. This includes 16 Luxembourg based pan-European funds totalling 42.2 billion.
Looking at the office markets’ total return across Europe, the UK has been hardest hit, followed by France and Germany. However Benelux “seems to be more resilient than other European geographies”, said Guillaume Choumil, client coverage consultant for real assets at MSCI.
Workforce immigration
Luxembourg offices alone have a total return of 6.5 percent, the same as the overall index, but better than other geographies, including France, the Netherlands and Sweden. “The risk premium seems to be still attractive for investors to allocate their capital into Luxembourg,” said Choumil.
Patrizia’s Denys pointed out that beyond having great political and economic stability, Luxembourg has a very specific market featuring strong workforce immigration.
The European-wide data also showed there’s been a 37 percent year-on-year drop in transaction volume. This is also happening in Belgium and Luxembourg, with drops between 10 and 20-25 percent. Jérôme Coppée of CBRE said that one factor is the Luxembourg owner’s experience of a very active historical market makes it hard for them to “acknowledge a price reduction or a re-pricing of their assets.” Investors, stung by increased financing costs, now look beyond Luxembourg, to cities where owners are more ready to do deals.
Liquidity measure
MSCI also generates a liquidity score measuring the depth and breadth of capital activity in the market – the higher that is, the more likely that an investor will get a good price when selling.
Luxembourg is facing a decrease of liquidity due to fewer unique buyers and less institutional investment. However, the country’s market is very dependent on overseas capital, and that is increasing from year to year. And comparing Luxembourg as a country to other cities on a five-year average, it is ahead of some active French cities and close to Brussels. “It means that Luxembourg is still attracting foreign capital and is still attractive also for investors to diversify their portfolio.” Baertz pointed out that if the analysis was limited to the central areas of Luxembourg city, the liquidity would be higher.
Luxembourg positioning in real estate markets -December 2021:
