Luxury Residences Report - I half 2023 - Press release
EXCLUSIVE RESIDENCES IN MILAN: THE TOP SEGMENT CONTINUES TO LEAD THE MARKET
Tirelli & Partners Società Benefit presented today the Exclusive Residences Observatory, with data for the first half of 2023. Dedicated to those who want to better understand and invest in Milan's dynamic market, a landmark that today celebrates its 20th year.
Sales
The market for buying and selling exclusive residences inMilan in the first half of 2023 shows strong differentiation on the demand side. On the one hand, for residences in the high-end and Top segment (price greater than 3 million), demand in the six-month period remained consistent, both from foreign and local buyers, both looking for rare buying opportunities. On the other hand, in the middle segment, demand was less active, mainly due to the more cautious and wait-and-see attitude shown by potential Italian buyers. "Some signs of a slowdown were already evident in the second half of 2022. The main factor negatively affecting this segment of the market is not so much the worsening in the conditions of access to credit, but rather the uncertainty regarding future scenarios that causes a dilation of decision-making time," comments Gabriele Torchiani, senior partner in charge of ORE.
The highest segments continue to be driven by searches from abroad (foreigners and returning Italians), which show no signs of declining and continue to face a largely insufficient supply in terms of quantity and often inadequate quality.
Milan is and remains very attractive both for those who wish to make it their residence and for investors who seek adequate returns and assets that are guaranteed to maintain their value in the medium to long term. In a market characterized by such thin supply, the level of prices is not a cause for concern. Clearly, when compared with the average Italian real estate market, Milan's prices appear out of scale, but the error lies in the term of comparison. Milan is among the group of large European cities, compared to which Milanese houses often have lower values per square meter.
The Absorption Index is down from the previous period, due to the preponderant weight in terms of dinumber of transactions of the Middle segment, the one that showed the slowest trend until June. The number of transactions is also held back by reduced and inadequate availability in the Top segment. However, the share of homes sold in the six-month period as a percentage of the stock remains at very high absolute values in Brera, Magenta and also in the "Other zones," which include all transactions above the 1 million euro threshold that occurred outside the individually mentioned zones.
The market dynamics highlighted in terms of the comparison of supply and demand induced a concomitant minimal increase in both the average selling time, which stands at 5.5 months, and the discounts obtained for closing negotiations, at 6.8 percent of the asking price. A trend always induced by the trend in the middle segment, while in the Top segment the rare quality homes offered find a buyer very quickly and at the asking price. The difference between high quality and lower quality residences is increasingly evident. For the former, there is demand far in excess of supply such that a significant proportion of the demand remains unsatisfied. In this segment there is no need for properties to pass through the "official" market, but they are "allocated" in private placement at the asking price.
Lower-value supply, on the other hand, arouses little or no interest, which results in a prolonged time on the market, which in turn generates in demand the expectation of further price reductions in a vicious circle that is difficult to break. The average holding time of residences without a buyer has remained stable at around two years-a clear sign of the selectivity of demand, which is unwilling to compromise on its expectations.
The asking price increases by 0.5 percent in the average value and by almost 0.8 percent in the maximum average value (houses in the last quartile of the statistical distribution of prices, those of the highest quality),continuing the trend of strong divarication of these values that we have been recording for at least 6 years in the market. We are facing a healthy dynamic of values, which, although faced with largely insufficient supply, does not create sudden price spikes. In the Top segment of the market (price greater than 5 mln) demand values follow a separate logic driven by extreme scarcity and break a new record by exceeding 20,000 € per sqm in 5 out of 6 of the surveyed areas. The average increase in the discount leads to a reduction of almost one percentage point in actual average sale prices.
New all-time record for a single transaction in Milan:35 million for a villa with garden and swimming pool in the Magenta area. The total amount of the three most significant sales of the semester exceeds 46million, with sale prices per square meter ranging from 13,750 to 25,400 euros.
In terms of purchase motives, the "first home" component rises again to 57 percent, also incorporating transactions related to buyers from abroad. The "replacement" share is worth 35 percent of the total, and the part relating to the investment purchase component drops slightly to 8 percent.
"The market," says Marco E. Tirelli, " continues to be driven by foreign investors. Interest in Milan remains at high levels, driven by a number of multiple contextual factors:
- It is the true "15-minute city," where nearly 90 percentof the most valuable residential locations are within 1.5 kilometers of the physical city center, which makes Milan a "human-sized" city;
- The perceived quality of life is very high: Milan combines European-sized real estate, cultural, health, etc., with Italian quality of living;
- The city offers quick access to lakes, countryside, sea, mountains and hills, vacation spots that can be reached in an exceptionally short time, probably unparalleled in the world;
- It is served by 3 international airports that provide quick and easy connections;
- There are numerous international secondary schools and universities in the city with excellent rankings in global rankings;
- It offers cultural institutions and important events of great international appeal to all. For all these reasons, prices are considered fair and attractive in comparison with its home cities and other competing European cities," Tirelli concludes.
Leases
The rental market continues to experience a positive trend driven by robust and urgent demand for exclusive residences. The primary demand is joined, amplifying it, by the secondary demand related to covering temporary needs of those who are looking for a home to buy, but are unable to meet that need. These are both Italians and foreigners or expats who choose to return to Italy for personal, work or tax reasons. In the range over 100,000 euros annually (over expenses), requests greatly exceed the available supply and are aimed at residences in an immediately habitable condition. The duration of the contracts is the 4-year term, but there is almost always provision for the tenant to terminate the contract early to allow for possible work or family moves.
Supply in the segment remains largely insufficient, despite the efforts of some landlords who decide to undertake a solid and complete renovation of their properties, an activity that the market rewards greatly in terms of return in both the short and medium term. In fact, it is usual for houses undergoing renovation to have leases signed before the work is completed.
Still on the rise in the six-month period is the absorption ratio:it comes close to 35 percent. For the vast majority of houses that do not find a tenant, the cause is to be found not so much in the level of the rent charged, but instead in the inadequate state of maintenance, which is disliked by potential tenants. In Brera and the "Other areas," the uptake exceeds 40 percent. In the other areas surveyed, lower values are recorded, mainly due to the continuing stock of a substantial proportion of unrenovated houses.
Average lease times, down to an all-time low of3.5 months, are a perfect testament to the market momentum in which beautiful, renovated homes do not have to wait to find a tenant. "With effervescent demand and thin supply, it is not surprising that the average discount still falls to an all-time record 4.2 percent. A figure that will be difficult to compress further, considering that it is the result of the average between the zero discount of the best residences, for which owners often have more than one bidder to choose from, and those in the second tier, which, to be rented, must accept offers with a discount of at least 10 percent compared to the demand," comments Torchiani. Stable at 10 months is the inventory time for houses that cannot find a tenant.
The increase in rents continues, rising on average by 1.3 percent (+1.6 percent for the best homes, +0.8 percent for those in the first quartile). Top rents-the maximum rents charged for individual units-remain very high, with values ranging from 600 euros per sqm in the Venice area to 1,000 in the Quadrilateral, for a unique penthouse in the city. The survey excludes from the analysis the mid-term rents presented on the market by specialized agencies for perfectly renovated, furnished and equipped houses at rents that are often close to those of the short term, and therefore not comparable with those of free 4+4 contracts also because they include management fees.
The relative share of demand from foreign tenants currently accounts for 30 percent of the total. For residences over 250 square meters with highly prestigious features, this percentage has become predominant, standing at around 75 percent. Three out of every four houses in the top 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 middle range will continue to be affected by uncertainty related to the turbulence of international economic and political scenarios. Here at least in the short term we will witness the phenomenon of "self-fulfilling forecasts" and thus a further slowdown. On the contrary, in the High and Top range, which is characterized by substantial international demand, further gradual increases in asking prices and actual transaction prices are expected. The expectation is thus for a continuation of the current trend in which the quality of supply remains the main market driver.
As far as leases are concerned, in the face of robust demand with probable room for further growth, the possibility of observing a gradual increase in the number of leases and asking rents is closely linked to an increase in supply, which does not seem foreseeable at the moment. Both large administrations and institutional investors today are in a situation of full occupancy.