Letting your property in Luxembourg

Luxembourg is an attractive market in which to offer residential property for rent. There is a ready supply of potential tenants thanks to a steady stream of international businesspeople and employees on short-term or longer assignments and in need of high-quality accommodation.

Meanwhile, the country’s population growth – from around 364,000 in 1980 to more than 661,000 at the beginning of 2024 – plus a chronic shortfall in construction of new homes has fuelled an imbalance between supply and demand. After rising strongly for the first two decades of this century, the average purchase price of houses and apartments across the grand duchy had fallen by more than 7% as of February 2024 compared to their peak in July 2022, according to property listing agency Immotop. However, rental prices have continued to increase, by almost 11.6% between the first quarter of 2022 and the first quarter of 2024.

Attempts to bridge the imbalance between housing supply and demand in recent years have enjoyed only limited success, with the construction of new housing falling back as prices reach the limits of affordability. Tax measures designed to curb the stockpiling by speculators of land zoned for construction are likely to take years to make a significant impact.

And while the authorities have lifted some planning constraints to facilitate higher-density housing, notably permitting taller buildings, other factors have slowed efforts to tackle the problem in recent years, including supply chain disruption, the rising cost of construction materials and higher interest rates constraining demand for home loans.

Attractive rental yields

According to data provider Numbeo, Luxembourg was ranked ninth among European cities (and 40th worldwide) for the rental cost of a one-bedroom apartment outside the central district at €1,454 as of the beginning of 2024, less than in London, Geneva, Dublin or Zurich, but higher than in Paris, Barcelona, Milan, Berlin or Frankfurt. The cost rises to around €1,900 in the city centre, according to local information provider Luxtoday, reaching as much as €4,000 for a three-bedroom flat.

Immotop says asking prices for rental property in Luxembourg averaged €26 per square metre per month in the 1st quarter of 2024, up from €17.64 in June 2015. Until 2022 at least, growth in rental yield has outpaced inflation over recent years.

Around 28% of Luxembourg’s households rent their home rather than owning it, reflecting a combination of high purchase prices, the significant proportion of employees in the country on a relatively short-term basis whose natural choice is to rent, and a cultural tradition among the domestic population only to buy a home when they start a family – not to mention a preference among Millennials for the flexibility renting offers. All these factors are likely to sustain demand for rental accommodation, at least in the short to medium term.

There is a well-established market for high-quality rental property in Luxembourg. The standard rental contract usually has a duration of two or three years, with a notice period of a minimum of three months for termination of a tenancy, which must be communicated by registered letter, with all rent being due until the end of the notice period. However, in many cases rental agreements will be tacitly extended, sometimes for several years. Such long-term lets are usually relatively easy to manage for a landlord.

The maximum yearly rent charged to tenants must not exceed 5% of the amount invested in the property.

Restrictions and costs

However, legal rules exist to prevent unscrupulous landlords taking advantage of the supply imbalance. Under legislation adopted in 2006, the maximum rent charged to tenants must not exceed 5% of the amount invested in the property – determined by an evaluation process, rather than simply the amount paid for the dwelling.

Landlords will usually protect themselves by seeking references or guarantors for the payment of rent. They will also take a deposit of up to a maximum of two months’ rent (compared with three months previously), which can be withheld if rent isn’t paid or there is damage to the property beyond normal wear and tear.

The headline rental yield does not take into account expenses such as agency costs or repairs. Agency fees can range from one to as much as three months’ rent, with value-added tax currently of 17% on top, though landlords can shop around for the best deal, balancing cost against the speed of bringing in new tenants – an important factor in determining the profitability of the property. The tenant usually pays any expenses relating to the building or housing services, such as routine maintenance, waste disposal and utility charges, but this needs to be spelled out in the rental contract.

When buying a property for rent, would-be buy-to-let investors will usually have to find at least 20% of the purchase price – which could be €200,000 or more for an average two-bedroom flat in Luxembourg City. Bank lenders will consider not only the rental yield but also the aggregate income of the purchaser, including their investment assets, when deciding whether to lend them the balance of the purchase price, and on what terms.

Buy-to-let loan interest rates tend to be slightly higher than for borrowing by owner-occupiers, who also benefit from tax credits not available for investors.

Acquisition costs

Buy-to-let loan interest rates tend to be slightly higher than for borrowing by owner-occupiers. They also need to factor in the other costs of buying a property in Luxembourg, including notary’s fees, fixed by law at around 1.5% of the property’s value, registration or land transfer tax of 6%, and a 1% transcription tax, plus an annual local property tax that varies between municipalities. These charges mean the upfront cost of a buy-to-let investment is high.

Contracts between tenants and landlords specify the monthly rental payments, the duration of the contract and other terms and conditions, and will usually be drafted by the estate agent or a lawyer, for a fee. The contract must be registered within three months of signature with Luxembourg’s Registration Duties, Estates and VAT Authority (Administration de l’Enregistrement et des Domaines), which will impose a charge equivalent to 0.6% of the overall rental amount.

Landlords are required by law to take out rental insurance and to provide tenants with a copy of the home’s energy passport, which describes the energy efficiency of the property. These additional costs should be subtracted from the revenue generated from the property and factored into the landlord’s calculations.

Scoping out the market

Most landlords will conduct an inventory check at the start and end of every tenancy. The tenant is obliged to leave the premises in the same condition in which they entered it, and the inventory check should help to flag any discrepancies. However, most landlords will make allowances for some wear and tear as a result of the normal use of a property.

Any potential landlord should have thought about the natural market for the type of property they are offering. For young urban professionals, a central location, a lively neighbourhood and good transport links are likely to be in high demand. For international families, access to European or international schools may be higher on their priority list. It is always worth doing research on potential tenants and levels of demand before buying a property for the rental market.

If a tenant withholds rent for several months, the landlord may take legal action to terminate the lease, evict the tenants and obtain repayment of the amount due plus interest.

No matter how careful a landlord’s due diligence, there is always the possibility of taking on a rogue tenant or someone who gets into financial difficulty. However, landlords have rights, too: tenants cannot unilaterally decide to pay a lower level of rent or not pay at all, even in response to a genuine grievance, such as repair work not being carried out promptly. If a tenant withholds rent for several months, the landlord may take legal action to terminate the lease, evict the tenant and obtain repayment of the amount due plus interest.

Resolving disputes

A tenant may take legal action if they have a grievance and are seeking a reduction in rent in compensation. This can only be obtained through a judge’s order in cases where the landlord is deemed to be in breach of the law. Tenants can also apply to the rent committee of the municipality in which the property is located for their rent to be reduced if they believe it is unjustifiably high. Rent committees, which operate from the municipal administration offices, can also act as conciliation bodies.

Nor can landlords unilaterally impose a rent increase; they must notify the tenant in writing, stating the grounds being used to justify the increase. In the event of a dispute, the tenant must present their case to the local authority rent committee, which will summon the two parties and attempt to find a solution. Landlords may increase the rent every two years, but not by more than 5% of the initial investment.

People buying property in Luxembourg for rent have benefited from favourable market conditions in recent years with rising prices. However, potential investors should still carry out due diligence to be sure they can reasonably anticipate the returns they are expecting.