The banking sector comes to the support of the construction of residential property

In response to the severity of the housing crisis, the Luxembourg banking sector, at the instigation of the Ministry of Finance, is joining forces to propose aid mechanisms to support the residential property sector and increase the supply of completed homes. This approach is a useful complement to the government’s measures to boost housing, as well as the recommendation of the Systemic Risk Committee (Comité du Risque Systémique – CdRS) concerning a temporary relaxation of the criteria for granting property loans to private customers.

Housing: a national emergency

The European Central Bank’s (ECB) rapid and substantial increase in its key interest rates as part of its anti-inflation policy has resulted in a rise in mortgage rates, leaving a number of households and businesses in the property and construction sectors in disarray. This new situation came on top of an environment already marked by high property prices and rising energy and commodity costs.

Some of our fellow citizens who were interested in buying a home were no longer able to meet the conditions set out in the legislation governing the granting of home loans. Others found it difficult to repay their loans. New lending by banks slowed. The construction market came to a virtual standstill, exacerbating the housing crisis and raising fears of a wave of bankruptcies in the construction sector.

“As soon as this Government took office, we made it a priority to revive the construction sector and create new homes. At the end of January, we therefore presented an initial package of measures to support people looking for a home, as well as businesses and investors. These measures were passed by the House last week. Other measures will follow. At the same time, I have always said that all stakeholders must take responsibility. That’s why I’m delighted today that the banks are ready to get more involved and come up with innovative solutions. I am confident that our joint efforts will be effective,” said Gilles Roth, Minister of Finance, at a press conference on 22 May 2024.

A complementary aid mechanism

In order to prevent a lasting and prolonged decline in the construction of new homes (cf. VEFA), and the negative knock-on effects that would ensue, temporary aid will be offered by banks active in the financing of residential property construction:

1. A special purpose vehicle (SPV): A new legal entity in the form of an SPV with Spuerkeess, Banque Internationale à Luxembourg (BIL), Banque Raiffeisen and SNCI among its initial shareholders will be created. The purpose of this entity will be to revive the construction sector and to purchase properties that developers have been unable to market, in order to ensure the continuation of ongoing projects, increase the supply of completed homes and, ultimately, maintain employment in the sector. A competitive project selection process will be put in place to ensure that sales take place at appropriate prices. Eligible projects will be financed through capital that participating banks will make available to the entity in question. The total amount raised is EUR 250 million, which will enable around 800-1300 homes to be put on the market. In addition to the initiating banks, other banks will be invited to participate in this project.
2. Additional envelopes: Banks active in residential property development are free to provide additional financing envelopes dedicated to housing construction, which will be granted according to criteria adapted to the current context. Some have already taken steps to this end.

A collective effort

With this initiative, the banking sector as a whole is reaffirming its willingness to support a whole section of the Luxembourg economy that generates jobs and knowledge and is a driving force behind the Grand Duchy’s attractiveness.

The CEO of the ABBL recalled the proposals made to the political parties during the legislative elections by the banking sector to revitalise the housing sector – some of which were taken up in recent government announcements – and the discussions begun with the Commission de Surveillance du Secteur Financier (CSSF) in 2020 to relax the conditions for granting bridge loans, which are currently continuing for mortgage loans in general (cf. levels and types of eligible capital, guarantees or precautionary measures to be respected by lending banks).

The CEOs of the SPV’s founding banks – Spuerkeess, BIL, Banque Raiffeisen and SNCI – emphasised the constructive nature of the discussions between the authorities and the banks. They highlighted the very short timeframe in which it had been possible to put in place mechanisms that will work to preserve Luxembourg’s economic and social foundations, proof in their view that the Luxembourg model works.

About the ABBL

The ABBL’s mission is to promote the sustainable development of regulated, innovative and responsible banking services. The ABBL is the largest and oldest professional association in the financial sector. It represents the banking sector in the broadest sense, i.e. the majority of banks established in Luxembourg, as well as regulated financial intermediaries and others in the sector including law firms, consultancies, auditors, market infrastructures, e-money and payment institutions.

The ABBL provides its members with the information, resources and services they need to operate in a dynamic financial market and an increasingly complex regulatory environment. It is an open platform for discussing key industry issues and developing common positions across the sector.