German investors have been internationalising their property portfolios for years. At the same time, foreign investors are increasingly drawn to the German real estate market. Though the momentum has fluctuated, the overall trend persists. As one of the leading fund domiciles in the world, Luxembourg has firmly established itself as a key player in this internationalisation.
Luxembourg’s success is underpinned by efficient bureaucracy, clear regulation, a proportionate financial supervisory authority, and an excellent local financial infrastructure.
A four-letter recipe for success
Luxembourg’s greatest asset as a fund domicile consists of four letters: CSSF, the Commission de Surveillance du Secteur Financier. The CSSF is renowned for its pragmatic and cooperative approach, enabling the creation of innovative fund structures tailored to the specific needs of international investors – and achieving this in a relatively short time frame. Luxembourg also offers a wide range of products, subject to varying levels of regulation, allowing for considerable freedom in choosing legal structures. Luxembourg’s fund vehicles are highly regarded internationally, even compared to Germany’s specialised funds (Spezialfonds).
Luxembourg’s domestic market is small: in purely mathematical terms, its fund industry manages around €10 million in assets per capita. This impressive figure is largely attributed to the EU passport system, which facilitates the marketing and pooling of Luxembourg-based funds throughout the EU, reinforcing its role as an international (real estate) fund hub.
Taxation and regulation: clear and efficient
Luxembourg also offers attractive tax advantages, including no withholding tax on dividends and interest, and certain tax exemptions on capital gains from real estate sales. Moreover, Luxembourg has double taxation agreements with many countries. However, the Grand Duchy’s success is not rooted in being a «tax haven» or having lax financial supervision. Quite the contrary, it is known for high investor protection standards and efficient regulation.
Luxembourg has evolved into a hub for the international financial and fund industry, promoting innovation in the financial sector. This allows the local fund industry to swiftly adapt to market trends and develop corresponding offerings. The large number of jobs in this segment and its pronounced international character attract highly qualified, multilingual specialists from across Europe. Luxembourg is effectively bilingual, with German/Letzeburgisch and French as the main languages, reflecting the two largest linguistic regions in the EU. Furthermore, Luxembourg has a longstanding tradition as a hub for investment funds, which has led to a diverse array of service providers establishing themselves there, with specializations that include fund asset management and custody.
New instruments, such as the «European Long-Term Investment Fund» (Eltif), are intended to extend the European single market to this field as well, by implementing AIF vehicles with a uniform European structure. This development is likely to reinforce Luxembourg’s role in the market: an Eltif, regardless of its country of origin, can now be marketed in any EU member state, subject to the fulfillment of certain formalities such as providing prospectuses and documentation in the local languages.
Luxembourg will maintain its position
Despite its impressive market position and undisputed advantages, Luxembourg is not without competition. A country like Ireland, which had once established itself as the regulatory preferred location for the financial and fund industries and faced challenges during the financial crisis, has repositioned itself, learning from its past mistakes. Currently, Ireland is gaining significance in the liquid segment of the fund industry, benefitting from its large neighbour’s Brexit. The Irish also see potential in the AIF segment for expanding their market position within the EU. And let’s not forget Germany: the country remains potentially the largest sales market by far. With the open-ended real estate special funds, Germany has a vehicle that has been a successful vehicle for decades, often copied but never matched in market penetration.
Luxembourg does not need to fear competition: quite the opposite, it ensures that the fund and financial hub continues to develop steadily. Therefore, I expect the country will maintain its outstanding importance as a fund domicile, particularly as an AIF hub in Europe, for the foreseeable future.
Kurt Jovy is Executive Director / Head of Real Estate Product Management & Head of Real Estate Luxembourg, Universal Investment. The firm is a knowledge partner of Investment Officer Luxembourg.