Market Overview: Signs of Stabilisation After the Correction

After a difficult period marked by rising interest rates, declining transaction volumes and falling residential prices, the Luxembourg real estate market began to recover in 2025.

According to STATEC (Luxembourg’s national statistics institute), the recovery was reflected in both pricing and transaction activity. After declining by 9.1% in 2023 and 5.2% in 2024, residential prices increased by 1.6% in 2025. Activity also recovered in the new build (vente en état futur d’achèvement or “VEFA”) market, where STATEC recorded 1,077 transactions in 2025 compared with 571 in 2023. The total value of VEFA transactions reached approximately EUR993 million in 2025, compared with EUR410 million two years earlier, while the average price per square metre stabilised at around EUR10,179 in 2025. These figures suggest that the market has moved beyond the strong correction experienced following the sharp increase in interest rates that began in 2022.

A more stable financing environment has supported the recovery. Although borrowing costs remain considerably higher than those that prevailed before the interest rate increases that began in 2022, buyers, sellers and lenders have gradually adapted to the new interest-rate environment. Financing conditions continue to be influenced by European Central Bank policy and inflation developments across the eurozone, both of which remain important considerations for investors and developers. While financing markets have become more predictable than during the period of rapid monetary tightening between 2022 and 2024, market participants continue to monitor interest-rate developments closely, as renewed upward pressure on borrowing costs could affect both transaction activity and development viability.

The improvement in market activity cannot, however, be explained solely by financing conditions. Government support measures introduced during the downturn also helped maintain market liquidity and encourage residential transactions. The increase in activity observed during 2025 should therefore be viewed against the backdrop of both improving market sentiment and continued state support.

As a result, Luxembourg entered 2026 in a stronger position than a year ago and investors appear increasingly comfortable pursuing opportunities in the current environment, while buyers and sellers have generally adjusted their expectations following the market correction.

Luxembourg continues to benefit from factors that have traditionally supported real estate investment, including political stability, a predictable legal framework and a well-established financial sector. These factors continue to support market confidence.

Key takeaways

• The Luxembourg real estate market has largely stabilised following the correction of 2023-2024.
• Existing residential assets are recovering more quickly than the new-build sector.
• Housing supply remains the market’s principal structural challenge.
• Public-sector intervention continues to play an important role in supporting VEFA activity.
• Investor interest in professionally managed rental housing continues to increase.
• ESG considerations are becoming increasingly relevant to asset valuation, financing and investment decisions.
• Office market fundamentals, including vacancy rates and occupier demand, remain comparatively resilient by European standards.

Residential market: a two-speed recovery

The most significant trend currently shaping the Luxembourg residential market is the growing divergence between existing residential properties and new developments.

Existing residential assets

The market for existing residential properties has shown the clearest signs of recovery. Following several years of reduced activity, buyers and sellers now appear better aligned on pricing expectations and transaction volumes have improved accordingly.

The recovery has also been supported by the continued imbalance between housing demand and available supply. Despite the slowdown experienced by the development sector, Luxembourg continues to face a structural housing shortage. Demand for housing continues to be fuelled by population growth, the expansion of Luxembourg’s financial and professional services sectors and the continued development of its cross-border labour market, all of which continue to generate demand for both owner-occupied and rental housing. This imbalance between supply and demand helps explain why prices have stabilised despite a more challenging financing environment. Although affordability remains a concern, the limited availability of new housing has prevented a significant increase in supply. Buyers unable to find suitable new-build opportunities have focused on existing stock, supporting both transaction volumes and pricing levels.

Government support has also contributed to the recovery. The temporary enhancement of the Bëllegen Akt and other housing-related measures helped sustain demand during a period of reduced market confidence and elevated financing costs. By reducing acquisition costs, these measures helped maintain liquidity in the residential market and encouraged buyers to proceed with transactions that may otherwise have been postponed.

While it is difficult to determine the precise effect of these measures, the increase in residential transactions reported by STATEC during 2025 suggests that public support and improving financing conditions together contributed to stabilising the market.

Another notable feature of the market is the continued demand for quality assets. Buyers remain focused on well-located properties requiring limited additional investment, while older properties needing substantial refurbishment continue to attract greater scrutiny.

Rental market and institutional residential investment

While attention has largely focused on the recovery of the owner-occupied housing market, the rental sector has remained comparatively resilient throughout the market correction. Higher financing costs and affordability constraints have led many households to postpone purchasing decisions, supporting demand for rental accommodation across much of the country. Market participants report that quality rental properties, particularly those located in and around Luxembourg City and other key employment centres, continue to experience strong occupancy levels and relatively limited availability.

Industry participants also observe a growing mismatch between demand for modern, energy-efficient rental accommodation and the stock currently available. This has contributed to growing interest in professionally managed residential assets capable of meeting evolving tenant expectations, particularly regarding energy performance, amenities and operational quality.

These dynamics continue to attract institutional interest in the residential sector. Build-to-rent developments, co-living schemes and purpose-built student accommodation are receiving increasing attention from investors seeking exposure to Luxembourg’s long-term demographic and housing fundamentals. Although the market remains relatively small compared with neighbouring jurisdictions and available investment product remains limited, a number of investors view the current environment as creating opportunities for professionally managed rental housing. Greater institutional participation may ultimately contribute to a broader diversification of Luxembourg’s traditionally owner-occupied residential market while helping to address persistent housing supply constraints.

New developments and the VEFA market

The recovery has been far less pronounced in the development sector.

Developers continue to face elevated construction costs, more restrictive financing conditions and longer sales cycles than those experienced during the years preceding the market correction. In addition to financing constraints, developers continue to cite regulatory approval timelines and planning procedures as factors contributing to delayed project delivery. Purchasers have become more selective and pay greater attention to delivery risk, price indexation clauses, construction timelines and developers’ financial position.

The land market has also remained relatively subdued. A number of market participants report that land pricing has adjusted more slowly than residential asset values and development economics, contributing to a disconnect between acquisition costs and project viability. In some cases, this has delayed land transactions and the launch of new property developments.

Concerns regarding the financial health of certain developers and construction companies have become a recurring topic within the market. Although these concerns are not universal, they have contributed to greater caution among purchasers considering off-plan acquisitions.

The market for VEFA transactions therefore remains significantly more challenging than the market for existing assets. In many cases, purchasers are willing to proceed with completed properties while remaining hesitant to assume construction and delivery risk.

The recovery in the VEFA market should also be viewed with some caution. While transaction volumes increased during 2025, a significant proportion of this activity was supported by public-sector intervention. According to the Ministry of Housing, the Luxembourg State had acquired 358 residential units through its VEFA acquisition programme by the end of 2025, representing an investment of approximately EUR221 million. Contracts had also been signed for a further 127 units, representing approximately EUR85 million. The programme ultimately aims to acquire around 800 housing units for a total budget of EUR480 million.

State intervention has continued to increase during 2026. According to the Ministry of Housing’s annual report, approximately 830 housing units had been acquired or reserved under the VEFA acquisition programme by mid-2026. These acquisitions have supported developers facing weaker sales activity while increasing the State’s affordable housing stock.

While VEFA transaction volumes recovered significantly during 2025, some market participants have questioned the extent to which this reflects a genuine recovery in demand from owner-occupiers. EuroCaution has observed that a substantial proportion of VEFA transactions completed during 2025 involved either public-sector entities or institutional investors. According to figures cited by EuroCaution, only around 15% to 20% of VEFA acquisitions were made by owner-occupiers, while approximately two-thirds were acquired by the State. These figures – if accurate – suggest that a significant part of the recovery in the new-build market has been supported by State intervention rather than by private demand.

The challenges in the development sector are particularly significant given Luxembourg’s continuing housing shortage. Housing supply remains one of the market’s most important long-term challenges. While transaction activity has recovered, the pace of new housing delivery remains below the country’s needs. The difficulties encountered by developers during the market correction have delayed projects and reduced the number of units reaching the market. As a result, pressure on existing housing stock remains significant, particularly in and around Luxembourg City where demand remains strongest.

In June 2026, market participants therefore closely watched the expiry of certain temporary support measures. One of the principal questions facing the market was whether transaction volumes would remain resilient once these support measures (or incentives) came to an end.

In July 2026, the Luxembourg government announced its Booster fir de Wunnengsbau package. According to the government, the package includes an increase in the Bëllegen Akt tax credit from EUR40,000 to EUR45,000 per person and a temporary exemption from registration and transcription duties (droits de transcription) on the construction component of certain VEFA acquisitions where the building has not yet reached 80% completion. The package also includes additional measures designed to support residential construction and improve access to housing.

The announcement highlights both the housing sector’s importance to Luxembourg’s economy and the government’s recognition that parts of the residential market still require support despite improving conditions.

Institutional participation in the residential sector also continues to grow. While owner occupation remains the dominant model in Luxembourg, investors are showing increasing interest in professionally managed residential products, including build-to-rent, co-living and purpose-built student accommodation. Although these segments remain relatively small and a lack of available product often limits investment opportunities, they are expected to become increasingly relevant as the market continues to evolve.

Office Market: Resilient Fundamentals in a More Selective Environment

Compared with many European jurisdictions, the Luxembourg office market continues to demonstrate relatively strong fundamentals.

According to JLL, vacancy levels remain comparatively low despite weaker occupier activity. This contrasts with several larger European office markets that have seen significant increases in vacancy levels following shifts in workplace practices and reduced office requirements.

Occupier demand nevertheless remains below historical averages. This reflects a combination of economic caution and changing workplace requirements. A number of occupiers continue to review their long-term space needs, resulting in lower office take-up than before the market correction. Nonetheless, Luxembourg continues to compare favourably with many other European office markets, where vacancy rates have increased much more significantly. According to JLL, vacancy levels in Luxembourg have remained relatively contained despite weaker demand and a challenging economic environment.

Demand is increasingly focused on prime office assets. Occupiers continue to favour buildings that offer modern specifications, attractive workplace environments and flexibility for evolving working patterns.

The divergence between prime sustainable office assets and older buildings with weaker environmental performance is becoming increasingly pronounced. Occupiers are displaying a clear preference for high-quality, energy-efficient space, while older assets may require substantial repositioning or refurbishment to remain competitive. This trend reflects a broader European pattern in which environmental performance is becoming an increasingly important factor in occupier decision-making and asset valuation.

A particular feature of the Luxembourg market remains the importance of public-sector occupiers. The Luxembourg State and European institutions continue to account for a significant share of office demand and remain among the market’s most important occupiers. Their continued presence has played an important stabilising role and helps explain why office vacancy levels have remained broadly under control despite weaker private-sector demand.

On the supply side, Luxembourg has largely avoided the large-scale speculative office developments seen in some neighbouring markets. This has helped preserve healthy fundamentals and limit upward pressure on vacancy rates.

According to CBRE, prime rents have also remained broadly stable despite reduced take-up, reflecting the continuing attractiveness of well-located office assets.

While the sector faces the same challenges affecting office markets across Europe, its underlying fundamentals remain sound. Investors continue to focus on location, tenant quality, lease duration and building specifications when assessing opportunities.

Logistics and industrial assets

Although considerably smaller than the residential and office sectors, logistics and light industrial assets continue to attract investor interest. Limited land availability and Luxembourg’s strategic location within the European transport network continue to support demand for well-located logistics assets. Market participants generally report that supply remains constrained, particularly for modern assets capable of meeting evolving occupier requirements. As in other sectors, occupiers are increasingly focused on building quality, energy performance and operational efficiency.

ESG and sustainability considerations

ESG considerations continue to influence investment decisions across the real estate sector.

For investors and lenders, energy performance is increasingly seen as a factor that can affect both financing conditions and long-term value. Assets with strong environmental performance are generally viewed more favourably, while buildings requiring significant energy-efficiency improvements may face additional costs in the future.

ESG considerations are increasingly influencing valuation methodologies and investment underwriting across European real estate markets. Consistent with broader trends identified by the Royal Institution of Chartered Surveyors (RICS) and other professional bodies, investors, lenders and valuers are placing greater emphasis on the extent to which environmental performance may affect liquidity, tenant demand, financing availability and long-term asset value. Sustainability is therefore increasingly viewed not merely as a compliance consideration but as a factor that can influence both investment risk and valuation outcomes.

The market is also witnessing a growing distinction between “green premiums” and “brown discounts”. While energy-efficient assets may benefit from stronger occupier demand, greater liquidity and enhanced financing opportunities, assets with weaker environmental performance may face increasing obsolescence risk. In practice, this may translate into higher capital expenditure requirements, refinancing challenges and reduced occupier demand, all of which can directly affect valuation and investment performance. Evidence from recent RICS research suggests that many market participants now view ESG characteristics as a material driver of value rather than a secondary consideration.

European regulatory developments, including the Sustainable Finance Disclosure Regulation (SFDR), the Corporate Sustainability Reporting Directive (CSRD) and the revised Energy Performance of Buildings Directive, continue to reinforce these trends.

As a result, investors increasingly distinguish between buildings that already meet modern standards and those that may require substantial refurbishment. These considerations are particularly relevant in the office market but are becoming increasingly important in the residential sector as well.

For many market participants, sustainability is no longer simply a compliance issue. It has become an increasingly important component of investment underwriting, financing decisions and valuation analysis. As ESG considerations become further embedded in regulatory frameworks and market practice, the distinction between future-proof assets and those facing potential obsolescence is likely to become increasingly significant.

Financing conditions

Financing conditions remain an important factor across all real estate sectors.

Although lending conditions have improved since the peak of the interest-rate cycle in 2023, lenders remain cautious. Asset quality, tenant strength and project viability remain central considerations when financing acquisitions and developments.

Refinancing activity is also becoming increasingly relevant. Across Europe, a number of financings entered into during the low-interest-rate environment are approaching maturity. Investors are therefore reassessing portfolios and considering disposals or restructurings where appropriate. These refinancing requirements continue to influence investment decisions and transaction activity.

Transaction processes have also become more protracted. Buyers generally place greater emphasis on due diligence than during the market peak, particularly in relation to construction risks, regulatory matters and the long-term performance of assets.

Outlook

The Luxembourg real estate market appears to have moved beyond the correction phase that followed the sharp increase in interest rates from 2022 onwards and is entering a period of gradual stabilisation. Residential prices have largely stabilised, transaction activity has recovered and market participants have become increasingly accustomed to the prevailing financing environment. Greater alignment between buyer and seller expectations has also contributed to a gradual return of liquidity across a number of market segments. While financing conditions have become more predictable than during the period of rapid monetary tightening, interest-rate developments and broader economic conditions will remain important factors influencing investor sentiment and transaction activity.

The central question facing the market is no longer whether conditions have stabilised, but whether the recovery can become self-sustaining. While existing residential assets have benefited from a return of confidence and continued supply constraints, the development sector continues to face significant challenges. Construction costs, financing constraints, regulatory approval timelines and land pricing dynamics continue to affect project viability and housing delivery. Developers’ ability to bring new projects to market will therefore remain one of the most important factors influencing Luxembourg’s residential sector in the coming years.

Housing supply is likely to remain a key policy and economic issue. Demand continues to be supported by population growth, a resilient labour market and Luxembourg’s role as a leading European financial centre. Against this backdrop, the pace at which new housing can be delivered is likely to remain a critical determinant of both affordability and market stability. The measures introduced under the Booster fir de Wunnengsbau package demonstrate the government’s continued commitment to supporting residential construction, although their effectiveness will ultimately be measured by their impact on housing production rather than transaction volumes alone.

Another point to monitor is the extent to which private-sector demand can replace the support provided by public intervention. Government acquisition programmes have played an important role in sustaining activity in the new-build sector during a period of reduced private demand. The durability of the recovery will increasingly depend on the willingness of owner-occupiers and investors to commit capital without relying on exceptional support measures. In this regard, the evolution of the VEFA market may provide one of the clearest indicators of the market’s underlying strength. Continued growth in institutional participation in residential and alternative living sectors may also provide an additional source of demand and liquidity as the market evolves.

The office market appears comparatively well positioned. Vacancy levels remain low by European standards and demand continues to be supported by public-sector occupiers, European institutions and Luxembourg’s professional services economy. At the same time, the gap between modern, sustainable buildings and older assets is expected to widen further. Occupiers, investors and lenders are increasingly focused on energy performance, operational efficiency and long-term sustainability, reinforcing the importance of asset quality and contributing to a growing distinction between future-proof assets and those facing potential obsolescence.

The growing importance of ESG considerations is also likely to influence investment and financing decisions across all market sectors. Consistent with broader trends observed across Europe, sustainability is increasingly being incorporated into valuation methodologies, lending decisions and investment underwriting. Buildings that meet evolving environmental standards are likely to benefit from stronger liquidity and occupier demand. At the same time, assets requiring significant future capital expenditure may face increasing pressure on value and financing terms.

For investors, Luxembourg continues to offer many of the characteristics that have historically underpinned its attractiveness, including political stability, legal certainty, strong institutions and a diversified economy. While the pace of recovery is likely to remain gradual and uneven across sectors, the real estate market’s underlying fundamentals remain supportive. The most important issue for 2027 and beyond will be whether housing production can recover sufficiently to address persistent supply shortages without continued reliance on large-scale public intervention. The answer to that question is likely to shape not only the future of Luxembourg’s residential market, but also the competitiveness, affordability and long-term resilience of the country’s real estate sector as a whole.