Exclusive Residences Observatory - First Half 2024 - Press Release
EXCLUSIVE RESIDENCES IN MILAN
IT IS QUALITY THAT MAKES THE DIFFERENCE, AND PRICES IN THE LUXURY SEGMENT REACH THE HIGHEST
TheExclusive Residences Observatory (ORE) was presented today at the offices of Tirelli & Partners Società Benefit with data for the first half of 2024. Since 2003, the ORE has been a reference point for those who want to understand in depth the dynamics of Milan's luxury market.
Purchases and sales
Demand for residences in the Top (between 3 and 6 million) and Luxury (over 6 million) segments is always very active, driven mainly by searches from abroad (Italians returning and foreigners mainly driven by tax-related motivations). The relative supply is always very limited in number and in any case often inadequate, but the rare houses with great quality readily find their motivated buyer.
In both the Low (between 1 and 2 million) and Medium (between 2 and 3million) ranges, on the other hand, demand has been more cautious, especially domestic demand. In these cases, and where conditions of particular urgency do not exist, a wait-and-see attitude prevails, induced as much by the general climate of uncertainty as by the difficulty of finding an offer that is truly improving on the present situation.
In all three segments the focus of demand is thus still on the quality of homes. Where quality is high, transactions still occur smoothly, albeit at different speeds: very fast in the Luxury/Top range; fast in the Low range; slower in the Medium range.
On the front of new real estate developments, the market is suffering from the significant reduction in supply, induced by the blocking of some projects and the freezing of new approvals as a result of the well-known problems that the "Save Milan" decree should have responded to long ago. Some of the demand has shifted its attention to the secondary market, the used market. However, due to both the quality gap and the emotional divide that digital technologies have created in favor of new developments, the increased attention to the secondary market has not automatically been followed by an equal increase in the number of transactions.
Indeed, the number of transactions is clearly declining, as is theabsorption index, down 3.5 percent on the overall average and with a negative inflection in Brera, where quality homes are even more scarce than elsewhere.
Some owners, often attracted by transaction values in the Top end or those in the new segment, yearn for values well above what is credible in relation to the market's perceived quality. Homes, therefore, build a history of failure in the market that is being remedied by successive multiple markdowns (made transparent to buyers thanks to portals) even during the first 30 to 60 days on offer. "This makes price dynamics very confusing and simultaneously generates expectations in the market of further future declines that reinforce the deferral of decision time. In contrast, in theTop segment the price dynamics are very clear and strongly increasing both because they are driven by the decisions of individuals who have ample spending power and fiscal convenience, and because homes in this range often belong to the category of those that cannot be missed," comments Gabriele Torchiani, senior partner and head of ORE.
The trend in average closing time for purchases and sales is affected by the general slowdown in the segment: it is back above 6 months (6.2) after 4 years spent below this threshold, with the lowest of 3.8 months recorded in the first part of 2022. The discount grows fractionally (+0.5 percent) to 6.7 percent.
It seems clear, therefore, that something in the market has changed over the past 2 years. While especially the Luxury segment continues to grind out transactions that close at asking prices with very tight timeframes, in the majority are transactions that fall into one of these three categories:
1. High-quality houses that, however, require more time for the decision to mature because of the price level demanded (Top range);
2. Good quality houses that find buyers in a longer time than in the past or at a discount from the asking price (Medium and Low range);
3. Medium/good quality houses that find buyers only after long time on the market and with significant reductions in selling price.
Supply with inadequate quality continues to languish with minimal chances of finding a buyer. Confirming this, the average time unsold residences are still growing, reaching nearly 27 months.
The dynamics of asking prices still show fractional increases (+0.69 percent the average price, a bit more pronounced the used price at +0.9 percent). It is clear that the index in question, referring to the entire segment of exclusive residences as a whole, is influenced by the properties that make up the bulk of the stock and thus the houses between 1 and 2 million. In this segment the increases/decreases between semesters do not show, except in extreme cases, great variations. Also weighing on the index are, on the one hand, the limited percentage of new entries on the market in relation to the existing stock, and on the other hand, the confusing price dynamics described above, which leads to reductions in initial demand values even within a very short period of time. Confirming this, the number of residences on the market that fell during the six-month period increased by 25 percent compared to the previous six-month period.
However, the overall price index hides a very significant phenomenon referring to the niche of houses in the Luxury range (price greater than 6 million). "Over the past 5 years, this market has been characterized by a significant rise in the maximum prices per square meter (ed. note the highest value per sq. m. required for a single real estate property)" - comments Marco E. Tirelli. "The most striking figure in absolute value concerns the Quadrilatero area, which has always been the most sought-after location in the city, where the top price per sqm has risen from 25,000 euros in 2021 to more than 37,000 euros in the first half of 2024, but this is a cross-sectional phenomenon in the different areas of the city that simultaneously reflects the increase in demand and the significant shortage of supply."
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These values are perhaps unexpected by the public and are justified as referring to exceptional properties purchased by individuals accustomed to similar and even higher prices in the world's major capitals. Certainly to reach these price per square meter levels each individual residence must have superior location and quality characteristics, but where these are met buyers are ready to buy, even quickly.
The price level is not a cause for concern, as further confirmed by the latest UBS Global Real Estate Bubble index report published on September 23, which still assigns Milan the lowest bubble risk in Europe (and second in the world only to São Paulo, Brazil).
"The reasons lie mainly precisely in a "healthy" price dynamic, which has not experienced unmotivated jerks over the years, and in the circumstance that Milan is constantly improving its attractiveness both for those who decide to make it their residence and for investors who seek adequate returns and assets that give a guarantee of maintaining their value in the medium to long term," Torchiani says.
The total amount of the three largest sales in the six-month period was more than 26 million, with sales prices per square meter ranging from 14,500 to more than 30,000.
The percentage breakdown among reasons for purchase remains largely unchanged from the second half of 2023: the "first home" component is worth 55 percent, incorporating also transactions related to buyers from abroad. The "replacement" portion is worth 38 percent of the total, and the investment portion rises slightly to 7 percent.
"The interest in Milan by foreigners remains at a very high level " - Tirelli confirms. "This is demonstrated by the circumstance that a large majority of those who have exercised the option for the facilitated regime art. 24-bis of the TUIR (the so-called "flat tax") have chosen precisely Milan as their place of residence."
Underlying this choice are multiple factors:
1. In the global context, prices of exclusive residences are considered "fair," and bubble risk-as mentioned above-is perceived as minimal;
2. 2026-the year of the Winter Olympics-is just around the corner, and the city's recognizability and attractiveness will be further amplified, following what has already happened thanks to Expo2015;
3. It is the true "15-minute city," a "human-sized" city where nearly 90 percent of the most valuable residential locations are less than 1.5 km from the physical center of the city;
4. Perceived quality of life is very high-Milan combines European-sized job, school/university, cultural, health, etc. offerings with Italian quality of living.
The leases
A very active demand continues to characterize the rental market for exclusive residences in Milan in all areas, zones and segments. Potential customers are now almost exclusively turning to recently renovated, semi-furnished (kitchen and closets) or furnished solutions. This is because what prevails today is the secondary demand, the one related to covering temporary needs, even for those who are looking for a home to buy but struggle to meet that need in the immediate term. The demand comes as much from Italians who are already residents as it does from foreigners or expats who choose to return to Italy for work or tax reasons. Even the primary demand - that linked to more permanent and stable needs - now expresses contracts that, although formally 4 years with a renewal option, actually have an average duration of less than 3 years, due to the changed social dynamics linked to the higher rate of international mobility of people.
In the High bracket-over 100,000 euros per year (excluding condominium expenses)-requests significantly exceed theavailable supply , and the situation worsens for apartments with rents over 180,000 euros (Top bracket). In both cases, requests are for perfect residences with great scenic appeal.
Even in the Medium and Low end of the spectrum, rental supply still remains insufficient, despite the movement back into the market of an initial (small, but indicative of an ongoing trend) number of properties that were running on the short-term circuit, whose expected returns have substantially caught up with those obtainable for furnished homes under traditional 4+4 contracts. As mentioned, the actual length of tenant tenure will in most cases be less than 4 years, but lower management fees and less intensive and wear and tear use of the house are convincing owners to turn again to the "traditional" segment for the same net income obtainable.
Still growing on average in the six-month period is the percentage of rented properties out of the total number on the market: theabsorption index reaches 36.6 percent. In Brera and the "Other areas" it exceeds 40%. Lower values are recorded in the other areas surveyed, mainly due to the persistence in stock of a substantial share of unrenovated houses. These are often owned by institutions or households that are very reluctant to make the necessary investments in renovation without first identifying a tenant.
Still very positive average values for average lease times, which are just above the record high in the first half of 2023 (3.6 months): nice, renovated homes do not wait long to find a tenant, and if they are still being renovated, contracts are often formalized before the work in progress is closed.
"On the other hand, a new all-time high is marked by the average discount, which falls to 4 percent, a value that is the result of active demand and deficient supply and represents the average between the zero discount of the best residences - for which owners often have more than one bidder to choose from - and the second-tier residences that, in order to be rented, must accept offers with a discount often close to 10 percent compared to the demand," Torchiani adds.
At 9.4 months--slightly up--the stocking times of homes that do not find a tenant confirming that what is discarded today does not become attractive tomorrow.
The upward trend in rents continues, rising by an average of 0.65%, and the process of dividing rents according to house characteristics also continues. The best ones on the market (those in the last quartile) mark +1.02% while the average +0.42% of those in the first quartile also hides within it three fractional declines (Centro storico,Magenta and Porta Venezia). Top rents per square meter - maximum asking rent per square meter - exceed 500 euros in all areas of the city.
The relative share of demand from abroad currently accounts for about a third of the total, although for residences over 250 square meters with highly prestigious features, three out of four houses are rented by foreign tenants or expats returning toItaly after spending long periods abroad.
Forecast
In buying and selling within the Lower end of the range, demand and the number of transactions are expected to remain stable if not slightly increasing. Exchanges at highs and falling interest rates may continue to channel resources to this segment for investment.
The Mid-range will continue to be affected by uncertainty related to the growing turbulence in international economic and political scenarios, and thus wait-and-see behavior may prevail that will not significantly make the market shine in terms of the number of purchases and sales.
In contrast, in the Top segment, which is characterized by substantial international demand and a consistently thin stock of product on offer, further increases in asking prices are expected to be possible despite the doubling of the flat tax amount to €200,000, which will have no impact on the number of applications, given the great convenience of this tax even at the new level. However, given the size of this segment, whose number of annual transactions is insignificant in percentage terms, this would statistically have an insignificant impact on overall average prices.
"It seems important to me to consider the impact that the dissemination of information (true or alleged) about the high values achieved by transactions in the Luxury segment may have on the remaining part of the market. This is a phenomenon that we have already observed in the past and to which we have given the name "accordion effect." Just as by raising an accordion on one side, the other side initially follows the upward movement and then returns to its initial level, so in the past an increase in Top transaction prices has been followed by a general rise in the level of sales prices demanded by owners in the lower ranges or those in the same range but with lower quality homes. In our experience this has never brought a real increase in actual sales prices, but rather induced a partial stagnation in the market resulting from the consistent distance between the expectations of owners those of buyers," explains Marco E Tirelli.
We must therefore hope that, thanks in part to the assistance provided to owners by real estate agents, application prices will continue to reflect the actual quality of homes and therefore sale prices will remain essentially stable.In contrast, it is reasonable to expect transaction prices to rise in the higher end of the market, especially for the Luxury segment over 6 million.
Regarding the number of transactions, as the quantity and quality of supply remain the main drivers of this market, we expect a decline in the short term. In the Top segment, there are signs that the thinning of supply, which has been going on for at least 2 years now, may have reached its lowest point. In fact, in the six-month period, on the one hand there were some transactions that took place completely off-market, and on the other hand the price level reached in this segment promises attractive returns to owners who have unused houses. As such, in the strictest confidentiality, some of them have begun to sound out the market.
On the rental side, demand will remain robust and likely to grow further, especially in the secondary component, driven by the transient needs of potential buyers who cannot find their new residence. With supply already tight and gradually emptying, however, it will be difficult to observe an increase in the number of leases. Rents may rise further, especially for furnished units, driven by at least three factors:
1. The steady semester-by-semester thinning of the available stock;
2. The current level of rents in the Top and Luxury segments, which, in the eyes of demand from abroad, still remains significantly lower than in competing cities;
3. The already ongoing trend in the rents of 4+4 contracts to convergence toward those required for mid-term leases.