, CEO of the Luxembourg Bankers’ Association (ABBL), spent around an hour providing more detail on the new housing support vehicle Prolog Luxembourg SA, (Spuerkeess, BIL, Banque Raiffeisen, SNCI and Banque de Luxembourg) to provide €250m in support of the housing construction sector. “Our primary aim is to restore confidence among buyers and investors,” he said on Thursday. The information session organised by the ABBL at the Chamber of Skilled Trades and Crafts (Chambre des Métiers), in partnership with the Chamber of Commerce and the developers’ section of the Chambre immobilière, Luxembourg's chamber of estate agents, provided answers to a number of questions.

Does the purchase option have to be activated?

“The SPV sells a purchase option to the developer, who is free to activate it or not,” explained Grbic. This purchase option is based on the price of the flats, with a 20% discount applied to a price estimated by a committee of experts.

“The developer is always free to sell the flats covered by the purchase option during the construction phase at a price that he sets himself,” added Grbic. “Only if the flats have not been sold by the end of construction does Prolog actually buy the flats. Ideally, Prolog doesn’t buy any flats. But if we ever find ourselves in the position of buying housing units, we will then try to sell them to NGOs or other organisations offering affordable housing. The private buyer market is not the target market.”

What are the eligibility criteria for projects?

Several criteria must be met for a residential construction project to benefit from Prolog:

- the projects concerned by Prolog are those for which the land and construction are financed by one of the five banks that are shareholders in Prolog Luxembourg SA;

- in addition, the pre-sale rate must be at least 50% of the sale price before discount. “However, this does not prevent developers from submitting their applications to Prolog before this 50% threshold is reached. In this way, obtaining a pre-approval from Prolog can become a communication tool for developers, providing them with an additional guarantee of the project’s feasibility when dealing with potential first customers”;

- the properties targeted by Prolog must fall within the criteria of the property selection matrix. For example, for a two-bedroom flat, the surface area must be between 55 and 99m2. This selection matrix is based on the specifications for affordable housing as defined by the housing ministry;

- the developer must take out ten-year and two-year insurance cover, as well as all-risk site insurance, calculated on the construction part;

- finally, to ensure a certain degree of diversity, Prolog’s contribution is limited to €30m per project and €50m per developer.

Once these criteria have been met, the banks and Prolog analyse the project. This analysis confirms the pre-sales rate, details the construction cost and calculates the break-even point. A control office examines the specifications and the investment committee analyses the selection of assets and the setting of the option exercise price.

How is the option price set?

To determine the option price, the analysis committee looks at the feasibility of the project under current market conditions. “To do this, it relies on VEFA [vente en l'état futur d'achèvement, or sale in the future state of completion] and market data supplied by Liser, i.e., historical figures by surface area, by region and by cadastral section. Analysis of the specifications is also very important. A bad development project cannot be saved by Prolog. If, for example, a plot of land has been bought at too high a price, this will show up in the analysis and will not be accepted.”

On the basis of this analysis, the investment committee confirms or corrects the sale price of the flats and applies an indicative discount of 20%, which determines the option price. “But there is no obligation to activate this option. The aim is for the developer to sell the residential unit during the construction phase.”

What does it cost the developer?

To benefit from Prolog, the developer will have to pay a commission. This is set at 0.1% of the total cost of the project, with a minimum of €7,500.

In addition, the developer must pay a fixed, one-off commission for the sale option, which is 1.5% of the average sale price of the properties to be optioned. This represents 0.45% of the total cost of the project.

So, in total, the developer will have to pay Prolog 0.55% of the overall project cost, excluding the interest costs of the construction line made available by the bank.

The use of Prolog therefore implies a reduction in a developer’s margin. Without Prolog, the developer’s margin could be around 17.64%. With Prolog, but without option activation, the margin becomes 15.85%. And with Prolog and option activation, the margin falls to 10.47%.

This article was originally published in .