Luxembourg: The Changing Ingredients Of Real Estate Valuation

Last Updated: 30 June 2017
Article by Pierre Kreemer

Most Read Contributor in Luxembourg, July 2019

Real estate valuations are not simple: many items must be considered by valuators and other real estate players. As I speak frequently with fund managers, investors, and third-party valuers, I have put together some observations on this topic. Read on for my firsthand take on this complex topic.


Political changes are important to track, of course, but they generally don't alter economic cycles, which are driven by long-term fundamentals. These cycles continue to exist and to produce their effects notwithstanding political events, which may certainly have short-term impacts.

Having said that, could Mr Trump's "America First" policy have an immediate impact on EU property valuations? Not necessarily. In answering this, one might consider the dynamics of international investors: in Europe, for example, we certainly see fewer US investors, but they have been replaced by Asian investors. This trend is expected to continue.

Financial markets

Financial markets certainly also influence (indirectly) property valuations. Listed stocks are part of global allocations in large institutional portfolios, though this asset class differs from real estate in terms of volatility, risks, multiples, etc. Alternatives to the stock exchange, as well as diversification, may also support interest in alternative asset classes, including real estate (though this is not to suggest that real estate is undervalued presently).

Interest rates play a key role: low, risk-free rates have led investors to adjust their return expectations across asset classes. Recent ECB discussions strengthen the view that a period of low interest rates will continue. If this is the case, real estate valuations will likely remain high: many do not expect interest rates to rise in Europe before the second half of 2018. The excess liquidity of the market means there is a lot of cash waiting to be spent, which also pushes prices upwards. This is especially true for core assets in core locations. It is, however, difficult to infer whether there is a bubble.

Various asset segments and differentiators

These play a role in valuation too. The current expectations for retail are less positive than for logistics, mainly due to the growing importance of e-commerce. Student housing and care homes, for example, are certainly less dependent on the economic cycle than retail or offices are.

Location, location, location

This very important element continues to represent a key driver for valuations. With the rise of tech solutions, however, advanced standards of communication have made remoteness less of a disadvantage. Companies don't need to have their tech functions located in the city centre, for example, which opens up different real estate possibilities. It will be interesting to observe the long-term impact of technological companies on the concept of "key location."

Portfolio transactions

Portfolio deals are more appetising than single asset transactions, as many buyers have big investment targets and need to buy fast, given that competition for assets is currently very high. These players are therefore looking at portfolio transactions, trying to meet their strategy requirements, and simultaneously perhaps looking for a degree of risk-spreading / diversification.

Within portfolios, there isn't a significant difference between portfolios of national properties and those of cross-border properties. We have recently seen portfolio premiums ranging from 5% to 15%.

Prime versus secondary real estate

Central business districts in the biggest cities, or space in "secondary" locations? International buyers might be willing to pay more for both, as they will compare prices on an international scale.


Valuers must also take development into consideration, which entails specific risks. In this area, forecasting is gaining in importance, as are areas like obsolescence, sustainability and energy consumption.

Tax on exit

Could tax on exit also affect valuation? Potentially yes, especially if there is a change in taxing rights for capital gains in share deal situations. Notably, "rich real estate provisions" are being increasingly adopted in applicable tax treaties (i.e. taxing gains on shares in the country where the property is situated), which could have an impact on after-tax returns and therefore on valuation. Relevant to mention here would be the signing of the OECD Multilateral Instrument (BEPS 15) two weeks ago, which might change the situation further going down the road.

Looking ahead

Another trend to keep an eye on are new digital solutions for valuation. Big data and algorithm-based solutions that can generate automated (residential) valuations are on the horizon, and could prove to make a large entrance.

And also, could IFRS 16 lead to shorter leases? How will this affect valuation?

Find out about KPMG's valuation tool on our webpage. KPMG is a partner of choice for valuations and related topics, be it as support in our audits or in the context of AIFMs' risk managers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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