My finances, my projects, my life
May 18, 2021

Letting property in Luxembourg

  Compiled by myLIFE team myHOME February 27, 2020 194

Luxembourg has much to recommend it as a market in which to provide residential property for rent. There is a ready supply of potential tenants thanks to a steady stream of international businesspeople on short-term or longer assignments in need of high-quality accommodation. At the same time, the growth in population has created an imbalance between supply and demand, which has pushed the prices of houses and apartments higher. However, rents have kept pace and yields still look attractive. Let’s have a deeper look!

The country’s housing boom shows no sign of abating. This can partly be attributed to a rising population – up from 364,000 in 1980 to more than 615,000 today. It continues to grow at a healthy pace of around 2.5%, and is expected to reach as many as 1.1 million people by 2050. The construction of new housing has failed to match the steady increase in demand, and while plans have been drawn up to build higher-density housing to help tackle the problem, this will take time to come on stream.

Attractive rental yields

As a result, housing prices have been rising by an average of almost 5% annually, and even faster in recent years. Rents have kept pace with price growth, keeping rental yields for landlords buoyant. The current yield on a 120-square-metre apartment in Luxembourg City is just over 4%, and the capital is comparable with Paris, Dublin and Copenhagen in terms of the absolute level of rent.

Around 30% of the country’s population rents their home rather than owning it. This is a reflection both of the high purchase costs, the large number of employees in the country temporarily whose natural choice is to rent, and a cultural tradition among the national population only to buy a home when they start a family. In addition, there is greater reluctance to buy property on the part of millennials, who often prefer the flexibility of renting. All these factors are likely to sustain demand for rental accommodation in the near 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 notified by registered letter, with all rent 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, there are legal rules in place to prevent unscrupulous landlords taking advantage of the supply imbalance. The maximum yearly rent charged to tenants must not exceed 5% of the amount invested in the property. Landlords will usually protect themselves by seeking references or guarantors for the payment of rent. They will also take a deposit, 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 amount to as much as two to three months’ rent, with VAT currently of 17% on top, though landlords can shop around for the best deal, balancing cost against the speed of attracting new tenants. The tenant will usually pay 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 rental property, potential buy-to-let investors will usually have to find at least 30% of the purchase price – which could be as much as €300,000 in the case of a two-bedroom flat in a sought-after district of Luxembourg City. Banks won’t only look at rental yield, but the aggregate income of the would-be purchaser, including their investment portfolio, to decide on whether to lend them the rest of the purchase price.

Buy-to-let mortgage rates are generally slightly higher than standard home loans, and investors won’t be able to claim the various tax credits open to owner-purchasers.

Acquisition costs

Buy-to-let mortgage rates are generally slightly higher than standard home loans, and investors won’t be able to claim the various tax credits open to owner-purchasers. 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 at 6%, and a 1% transcript tax, plus annual property taxes, which vary from canton to canton. These means the upfront cost for a buy-to-let investment is high.

Contracts between tenants and landlords, which will specify the monthly rental payments, the duration of the contract and other terms and conditions, 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 the Land Registration and Estates Department (Administration de l’Enregistrement et des Domaines, www.aed.public.lu), 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 property’s ‘energy passport’, which describes the energy efficiency of the property. These additional costs to be subtracted from the revenue generated from the property should be factored into any 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 problems. However, most landlords will make allowances for some wear and tear as part of the normal use of a property.

Any potential landlord should have a grasp of 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 is likely to be high on their list. It is always worth doing some research on potential tenants and levels of demand before buying a property destined 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 rent or not to 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 tenants and obtain repayment of the amount due plus interest.

Resolving disputes

A tenant may also go to court 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 commission 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.

Equally, the landlord cannot unilaterally impose a rent increase on the tenant, but must notify the tenant in writing, stating the grounds justifying the increase. If it is disputed, the tenant must present their case to their local rent committee, which will summon the two parties and attempt to find a solution.

People buying property in Luxembourg for rental have benefited from favourable market conditions in recent years with rising house price and rents. However, potential investors still need to do their due diligence to make sure they achieve the returns they expect.