Exclusive Residences Observatory - Second Half 2023 - Press Release
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EXCLUSIVE RESIDENCES IN MILAN: HOMES WANTED DESPERATELY
Tirelli & Partners Società Benefit presented today theExclusive Residences Observatory, with data for the second half of 2023. Dedicated to those who want to better understand and invest in the dynamic Milanese market, a landmark that concludes its 20th year with this publication.
Purchases and sales
The strong segmentation of demand already evidenced in the last two semesters has continued into the second part of 2023. In the Top range (over 3 million) there is still substantial demand, ready to immediately turn into purchase proposals when it meets the right product. Even in the Lower range (between 1and 2 million) demand is still present and active, while in the Middle range (between 2 and 3 million) behaviors characterized by wait-and-see and caution dictated mainly by considerations regarding the current economic situation and expectations for the future one have prevailed. Overall, the market expresses transactions in all three price ranges, albeit in different ways and with different timing.
"In all three segments the focus of demand is on the quality of homes. Where quality is high, transactions still occur smoothly, albeit at different speeds. At the Top end, transactions happen abruptly; at the Low end they happen quickly, while theMedium end is slower," comments Gabriele Torchiani, senior partner and head of ORE.
The Top segment is always driven by searches fromabroad (foreigners and returning Italians) that accumulate in real estate agency databases as they are confronted with a limited supply and in any case often inadequate in quality. The result is a very thin stock, the likes of which has never been seen before in Milan. In the Medium segment, demand is mainly local and thus oriented toward improving one's current housing situation. The scarcity and difficulty of finding an improved offer compared to the present one, combined with the higher cost of credit causes a dilation of the decision time. In the Low segment, demand is as local (and therefore aimed at first home) as it is Italian and therefore aimed at investment. Here, too, quality supply is still lower than demand, while at the same time there are a large number of unsold houses because they are of insufficient quality.
Thequalitative insufficiency and quantitative limitation of supply are dictated by multiple concomitant factors:
- The buying rush that occurred in the post-pandemic reduced the existing stock in terms of numbers, but even more so in terms of quality considering that that demand was primarily aimed at adding livable outdoor space to one's home;
- The exponential increase in demand from foreign or Italian return buyers driven by the tax benefits dedicated to them has drained the stock of homes in theTop segment. In this segment, in fact, more than 50 percent of transactions come from these categories of buyers, a demand that was completely absent before2019. Considering that the level of "domestic" demand (i.e., that of the Milanese and those who moved to the city from Italy) has reasonably remained unchanged over the period, it follows that for at least 4/5 years in this market the number of transactions has doubled compared to 2018;
- Highly motivated and very rapid demand in the purchase decision has increased off-market transactions, which by not going through the usual channels also distort the perception of the stock of available houses;
- The rekindling after two decades of an inflationary wave has channeled a significant amount of financial resources to the investment real estate product, especially in Milan, a city that has been able to create a highly successful image for itself.
In general, the number of transactions decreased in the six-month period, despite the substantial unchangedabsorption index (-0.6%).
The combined trend in sales time and discounts fully reflects what was shown in terms of supply-demand comparisons in the second half of 2023. The average closing time for buying and selling is essentially stable at 5.4 months, a time in line with that recorded in the first half of the year, but still significantly longer than the values recorded in 2021 and 2022. Compared to the previous six-month period (6.8 percent), the gap between the asking price and the price obtained is slightly lowered to 6.2 percent.
As usual, the average figure summarizes situations that are very far apart. In fact, transactions involving good quality properties materialize in a very short time, often off-market, without discounts or with minimal price rounding and with mutual satisfaction of the parties. On the other hand, the less valuable offerings, which attract less interest, must necessarily go through the "official" market and, in the case of a long tenure, will probably have to discount to be attractive.
"Considering that in 2021 and 2022 the average discount was around 5.2 percent, the rise clearly shows the growth of transactions in the second group compared to the first and thus confirms the thinning of the stock of high-quality properties," comments Marco E Tirelli.
Supply with inadequate quality, on the other hand, continues to languish in the market with no chance of finding a buyer. Confirming this, the average inventory time of residences that cannot find a buyer is still growing, exceeding two years.
Despite the scarcity of supply, the dynamics of asking prices remain healthy, showing small fractional increases. If in the territorially smaller zones (Quadrilatero and Porta Venezia) the trend values remain around parity due to the very limited number of new listings, Brera and the "Other Zones" (the latter logical and non-geographical entity that groups houses priced above 1 million euros outside the individually mentioned zones), show average increases of 0.3 percent.
During the six-month period, the average asking price was essentially stable (+0.21%), while the average maximum (houses in the last quartile of the statistical distribution of prices, those of higher quality) registered a very slight negative sign (-0.05%) after several semesters always marked by a + sign. Again a confirmation of the very limited incidence of new supply in the semester.
The Top price per square meter for a single residence exceeds €20,000 per square meter in all 5 specific areas surveyed (and goes over €30,000 in Quadrilatero and Brera).
From the comparison with the previous year, the actual average selling prices are basically unchanged (-0.1%) being the negative sign a consequence of the prevalence of the increase in the obtained discount (+0.9%) over that of the average asking prices (+0.8%).
"The price level is not a particular concern. Milan maintains and improves its attractiveness both for those who decide to make it their residence, and for investors who are looking for adequate returns and assets that give a guarantee of maintaining their value in the medium to long term "-said Gabriele Torchiani. "When compared with the average Italian real estate market, Milan's prices appear out of scale, but it is the term of comparison that is wrong. Milan is in the group of large European cities, compared to which the city's exclusive residences have lower values per square meter."
"Only for London there are reasons of international attractiveness that justify this price gap with Milan," - adds Marco E Tirelli. "The main reason for this gap in the Super Top bracket (greater than 6 million) is in fact given by the total absence of an offer with international quality standards. As with any luxury product, in fact, it is supply that creates demand and not vice versa."
The total amount of the three largest sales in the six-month period was over 22 million, with sales prices per square meter ranging from 13,000 to over 20,000.
Compared with the first part of the year, the percentage breakdown among purchase motivations changes little : the "first home" component is still worth just under three-fifths (58 percent), also incorporating transactions related to buyers from abroad. The "replacement" portion is worth 36 percent of the total, and the investment portion drops slightly to 6 percent.
Interest in Milan by foreigners remains at high levels, prices are still considered fair and often favorable in comparison with home cities and other "competing" European cities.
The leases
The rental market continues to be driven by strong demand often having characteristics of immediate need. In addition to the primary demand dictated by medium- to long-term housing needs, there is a secondary demand linked to covering the temporary needs of those who are looking for a home to buy, but are unable to meet that need in the immediate term either because of a shortage of supply or, for some, because of the burden of accessing credit. The demand is as much from Italians already resident as it is from foreigners or expats who choose to return to Italy for work or tax reasons.
"In the High bracket - that is over 100,000 euros per year excluding condominium expenses - the requests significantly exceed the available supply and the situation worsens for apartments with rents above 15,000 euros per month " - comments Gabriele Torchiani. "In both cases, requests are for residences in immediately habitable condition."
Even in the Low and Mid-range, rentalsupply remains largely insufficient, partly due to the shift of some of the newly renovated properties to the short- and mid-term segment of furnished homes, which is potentially attractive in terms of expected returns.
Still on the rise in the first half of the year is the percentage of rented properties out of the total number on the market: it reaches an average of 35.5 percent. In Brera and the "Other areas" the absorption index is well above 40%. Lower values are recorded in the other areas surveyed, mainly due to the persistence in stock of a substantial share of unrenovated houses.
In fact, many of the houses that do not find a tenant remain on the market not so much because of the level of rent charged, but instead because of the inadequate state of maintenance. The increased mobility of tenants, who, although on 4+4 contracts, often terminate their contracts before the expiration of the first four-year term, has directed demand only toward houses that have been renovated, whitewashed and have newly furnished bathrooms and kitchens.
Average lease times remain below 4 months(3.8): nice, renovated homes do not have to wait long to find a tenant. The average discount also remains close to 4 percent, a value that is the result of active demand and deficient supply. This value is the result of the average between the zero discount for the best residences, for which owners often have more than one bidder to choose from, and a discount that is often close to or more than 10 percent compared to the demand for second-tier homes. At 9.2 months--slightly decreasing--thestock time of homes that cannot find a tenant.
Theincrease in rents continues, rising on average by 0.66 percent (+1.03 percent for top houses, +0.42 percent for those in the first quartile). Top rents - maximum rents charged for individual units - remain very high, with values above 600 euros per square meter in all areas of the city.
The six-month period saw an all-time record for a residential lease in Milan. "The rental sector proves this semester the validity of the principle that for luxury goods it is supply that creates demand. And so an exceptional house in terms of location, size, level of finishes, and availability of panoramic terraces resulted in a new record for total rent and per sqm over €700,000 and over €1,300, respectively" -comments Marco E Tirelli. "Perhaps it may surprise many even among those active in the sector, but not us who advised the owner."
These are clearly transactions that do not affect the rest of the market in any way, but they show possible disdevelopment directions to be seized.
The relative share of demand from abroad currently accounts for about 30 percent of the total. For residences over 250 square meters with highly prestigious features, however, this percentage is predominant. Three out of every four houses in the higher end of the market are rented by foreign tenants or expats returning to Italy after spending long periods abroad.
Forecast
In buying and selling, demand for housing in the Lower end and the number of transactions could remain stable. Stock markets at highs and still high inflation could continue to channel resources to this investment segment. The Middle range will continue to be affected by uncertainty related to turbulent international economic and political scenarios. In periods of uncertainty, there is a tendency for conservative behavior. In contrast, in the Top range, which is characterized by substantial international demand and an unprecedentedly thin stock of product on offer, possible increases in asking prices are expected. Those holding quality product may decide to sell it with increasing demands. However, given the size of this segment, whose number of annual transactions is minimal, this would have no impact on prices in the other segments. Overall in terms of buying and selling prices, substantial stability is expected. "On the other hand, as far as the number of transactions is concerned, since the quantity and quality of supply remain the main driver of this market, we cannot foresee an increase in the short term," Tirelli concludes.
As for leases, 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, it will be difficult to observe an increase in the number of leases. Rents may rise further, especially for furnished units, driven both by the scarcity effect and by the trend already underway of convergence toward those required for mid-term leases.