Luxury Residences Report - II half 2021 - Press release

EXCLUSIVE RESIDENCES IN MILAN: BUYERS PAW AT IT, BUT HOMES ARE LACKING

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TheObservatory on Exclusive Residences published by Tirelli & Partners Società Benefit with data for the second half of 2021 was presented today. The report analyzes in detail the highest segment of the real estate market for the city of Milan.

Demand and supply

The second half of 2021 still sees irrepressible purchase demand, which continues its momentum in both the search for first homes and the replacement component. The area of income investment is also growing vigorously after a physiological decline during the period marked by the pandemic-induced lull in rentals. "It continues, however, not to keep up, the supply of quality real estate adequate to the demands that tend to accumulate and consequently exponentially increase the time it takes to be satisfied.There is a lack of high quality homes suitable for justifiably demanding and selective buyers, both in the lower range (up to 2M€), but even more so in the upper range. And so, it takes even up to three or four years of unsuccessful attempts to be able to get a house," comments Gabriele Torchiani -senior partner in charge of the Observatory.

The number of transactions is growing, but not as much as would be possible with such active and determined demand. Fewer and fewer houses are appearing on the "official" market, very often of inadequate quality. The best exclusive residences are increasingly being "assigned" to highly motivated clients through negotiations handled in private placement by agencies that have a long list of purchase requests to satisfy.

Theabsorption index-the share of houses sold relative to the stock on offer-increases again by almost one percentage point over the first half of 2021 to 26.4 percent. In Brera, more than half of the houses that entered the market came off during the six-month period. In CentroStorico and the Venice area, the index drops slightly, mainly due to the very slowing dynamics of supply.

In a market that continues to be driven by sellers, it is not surprising that the descent of both the timing of sales and the discount to asking price continues. The former are coming in at an average of just over 4 months, but there are an increasing number of very quick buys and sells, such as those off market, generally defined as less than 20 days. The average discount recorded is just over 5 percent, and even here the value contains a considerable variance between transactions in which buyers, fearful of losing a rare opportunity, fully comply with the request and those involving houses that have been on the market for longer and therefore less desirable, for which owners must accept far greater price reductions to close the deal.

On the other hand, the average time unsold properties are stable, the absolute value of which still remains just under two years, a huge amount of time in such an effervescent market, reflecting the strong selectivity of demand. "Increasingly, houses that do not find an instant buyer off market and are offered on real estate portals, if they do not have true qualities to compensate for their immediately perceivable defects, are destined to languish in supply, progressively generating in potential buyers a vicious circle of disinterest or even outright rejection" -says Marco E. Tirelli.

Price trends show a 0.4 percent growth in the overall average. As in the previous survey period, the changes recorded are generally low, contrary to what might be expected in a market with the supply and demand characteristics we have highlighted. It should be remembered, however, that the race to the top has already had very significant effects: since 2015, average asking prices have risen by 10 percent and actual sales prices by 20 percent, due to the concomitant reduction in the average discount. At the level of individual areas, the dynamics of asking prices are more varied and the variations wider than usual, evidently due to very thin supply especially in smaller areas.

In this six-month period, average maximum prices fell slightly, those of houses in the first quartile-the most exclusive and expensive-which quickly disappeared from the market without finding immediate replacement.On the other hand, average minimum prices grew by 1.3 percent-the houses in the fourth quartile-due to increases in owners' requests driven by the general mood of the market, but often inconsistent with the houses' characteristics. The combination of the increase in asking prices and the decrease in the discount has generated a further increase in the average actual sale prices recorded in 2021, 1.3 percent over the average value in 2020.

A separate discussion deserves the houses in the Top segment (>5M€), where the few transactions have shown significant increases in closing prices of negotiations. Buyers are often foreigners who are not frightened by demands of 20 thousand euros per sqm. In the six-month period, the total amount of the three largest transactions exceeded 23 million, with average sale prices of more than 11,500 euros per square meter.

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Leases

Rental demand grew strongly in the second half of 2021, after months of slowdown caused by the health emergency and related difficulties in travel and commuting and uncertainties in the job prospects of potential tenants. But even in this segment, the shortage of really valuable properties and especially in perfect condition of use did not lead to a consequent strong increase in the numbers of registered contracts.

The niche of super-top exclusive residences(over €200,000 per year) fully furnished and equipped is being consolidated, which still has a few dozen units offered and rented very quickly with contracts that will average between 6 and 18 months. There is also a potential trickle-down effect to the immediate lower end, with landlords becoming convinced of the desirability of renovating, furnishing and equipping properties, counting on a prospective rent increase that can generate a congruous payback period for the investment. Conversely, landlords who do not decide to bring their homes up to the new standards demanded by a demand that does not even take into account homes that need to be fixed up can only expect long periods of vacancy, which not even subsequent declines in asking rents will be able to fill.

With this in mind, it is not surprising that the percentage of houses rented during the period remains stable compared to the previous six months, standing at 30.5 percent. More than two-thirds of the houses offered remain vacant precisely because of their condition of use.

However, average rental times drop slightly to just over 6 months. The variance in this figure is very high, between perfect houses that are rented very quickly and those that are not quite ready to live in, for which the process is much longer.

The average holding time for unrented properties goes back over a year in the six-month period because the stock includes homes that require extensive renovations, in which the market shows almost no interest.

The average discount obtained in negotiations falls below 5 percent-the lowest figure in the past decade-confirming that for the most desirable houses, a rounding up considered fair is all that can be asked to close the deal.

On the asking rents front, very little change is shown: a minimal reduction for the average value (-0.14%)caused mainly by little turnover in supply, which saw the best houses leave the market. A similar but more pronounced trend (-0.43%) is shown by average minimum rents. On the other hand, maximums grow slightly (+0.28%), but the most relevant data concerns the very marked increase in the top rents requested, those of the super-top niche, which reach almost 670 euros per sqm inQuadrilatero and around 600 for a house in Brera.

Forecast

In buying and selling, with very strong, dynamic, but selective demand, the real driver of the market will continue to be the quality of supply. However, given the thinness of the stock with such a characteristic, in the second first part of 2022 we cannot expect shocks in market indicators, but we expect a consolidation of the current trend.

For rentals, with demand likely to grow further, partly due to households having to opt for renting while waiting to find the right house to buy, the scenario will be driven by the propensity of landlords to redevelop their assets: if this happens over the next few years, both the number of contracts and rents may gradually increase.