Luxury Residences Report - II half 2022 - Press release
EXCLUSIVE RESIDENCES IN MILAN:TOP SEGMENT IS A FOREIGN-DRIVEN MARKET
The Observatory on Exclusive Residences published by Tirelli & Partners Società Benefit with data for the second half of 2022 was presented today. The report analyzes in detail the highest segment of the real estate market for the city of Milan.
Demand and supply
In the second half of 2022, demand for exclusive residences in Milan-in the "mid-range" and only for the local and domestic component-showed a certain slowdown compared to the record-breaking frenzy recorded in the previous six months. This is only partially due to the changed conditions of access to credit, but mainly to the uncertain situation of future scenarios.
"In contrast, searches from abroad have shown no signs of declining, fueled by multiple factors, mainly attributable to tax breaks for the return of Italians from abroad, Brexit-induced arrivals, and the tax convenience of the flat tax. The time required to meet them continues to grow, and the resulting impact on the market of alternative transitional leases continues," comments Gabriele Torchiani, senior partner in charge of ORE.
Brera and the Quadrilateral are the most sought-after areas, mainly because of the fame and immediate recognition by foreign buyers.
The supply of exclusive residences, however, remains very thin and often inadequate for the many absolutely valuable features in demand. Always few properties enter the official market in the semester or are offered off-market in all surveyed areas, particularly those of large size, above 250sqm. The number of transactions is thus held back by the reduced availability of the stock, especially in the top segment.
On average, the absorption index shows a fractional decline from the record high in the first half of the year. On an annual basis, however, the 2022 value (27.2%) is the highest recorded since 2010.
It does not actually change the attitude of buyers, who express a very demanding and mature demand in their purchase decision and who, despite long waits to identify their future home, are unwilling to radically reduce their expectations by accepting a quality level below their expectations or indiscriminately expanding their search area.
The few quality homes offered find a buyer very quickly; the average time to sale is 4 months, a figure that incorporates both near-instant sales (homes for which agencies have multiple unanswered inquiries and therefore do not need to transit the official market and are essentially "assigned" in private placements) and those related to properties that have been on the market longer and sold in the six-month period.
This market dynamic is also reflected in the trend of discounts from the initial request: the most desirable houses are often sold overnight at the asking price, while the less valuable ones with a visible history on the portal market have to suffer declines around 10-12%. The average year-over-year figure remains stable at 5.3 percent,an appropriate value in a seller-driven market.
The average length of time residences that do not find a buyer grows slightly, just under two years. A figure that in a market so unbalanced between supply and demand proves the selectivity of a demand that does not chase properties at all costs unless they have great quality.
"The market for exclusive residences in Milan is healthy. Prices in the Top segment have certainly risen a lot in recent years. It is a fact related to the exceptional increase in interest at the international level that Milan has had in the last 3-4 years and the great shortage of high-quality housing. There is a lack of TOP homes on the one hand because the size of the city's prestige areas is minimal (amounting to 4.5 square kilometers, 2.5% of the territory);on the other hand, because residential developments are almost absent in these areas. Also weighing on this has been the combined effect of high directional rents and low cap rates, which have made it more profitable to make office space in the best areas of the city than luxury housing." - says Marco E. Tirelli.
Asking prices are still growing, but slowing the trend compared to the previous survey period, reflecting as mentioned the combination of somewhat more cautious demand, reduced supply, and the resulting stability in the number of purchases and sales.
The overall average price rises 0.4 percent, and the progressive spread of values segmented by condition of use (used +0.3 percent and new +0.5 percent) and by quality (+0.2 percent the lowest average and +0.6 percent the highest average, homes in the last quartile of the statistical price distribution) continues.
The average value per body of properties offered in the six-month period falls by an additional 0.4 percent, due to the continued average decrease in the relative areas. In 3 of the 6 areas surveyed, the top price of individual properties exceeds €20,000 per square meter.
Actual average sales prices net of the discount applied in 2022 transactions grew by 1.4 percent over the previous year. Compared to 2013-an annus horribilis for this segment-the total increase is close to 18 percent, a value that is certainly remarkable but consistent with the supply-demand dynamic that has characterized these 10 years and with the great positive contextual evolution of the attractiveness of Milan and its residential market.
"There are no well-founded concerns regarding potential speculative "bubbles," not least because of the size of the market for exclusive residences, which is really minimal. Transactions above one million euros in Italy amounted to 4,570 in 2021 (the last year for which official data from the Italian Notariat are available) equal to 0.728%of transactions, but the TOP segment starts from at least 3.5 mln. In total, we are talking about an insignificant number of transactions compared to the approximately 30,000 transactions that took place in the city in 2022 "-says Gabriele Torchiani.
Interest in Milan by foreigners continues to grow, driven by a number of multiple contextual factors and by prices still considered fair and attractive in comparison with other European alpha cities. They look for large houses with all the best features: architectural quality of the building, high floor, brightness, terrace, parking space, ... and as mentioned they struggle a lot to find them.
The total amount of the three largest transactions in the six-month period is close to 25 million, with sales prices varying widely, ranging from 12,000 to 19,300 euros per square meter.
Leases
The strong and pressing demand for renting exclusive residences in Milan today is mainly driven by the temporary needs related to the protracted search for a home to buy as much for the domestic market as for that of foreigners or expats who decide to return to Italy for personal choice, work reasons or tax attractiveness. Requests far exceed availability, especially in the over 100,000 euro annual rent range, and are aimed at homes in perfect condition, given that prospectively contracts will last between 18 and 24 months at most.
Supply is unable to keep up with this kind of demand in terms of availability, despite the efforts made by some owners who decide to move in the direction of a sound and thorough restructuring of their assets, unequivocally indicated by the market as the way to stay in the market and maximize returns.
The absorption index continues to rise and in the six-month period it is close to 33 percent. The average figure (one in three houses rented in the period)is still negatively affected by the presence on the market of houses that do not meet the required criteria of immediate habitability and quality. For the vast majority of houses that do not find a tenant, the impeding condition lies not so much in the level of the rent charged, but rather precisely in the state of use.
Average lease times revolve around 5 months but, as is the case with buying and selling, the figure contains a very high variance, ranging between the minimum of one month physiologically necessary to sign the contract and the 8/9 months of the least attractive houses for potential tenants.
The average discount stands at 4.5 percent, just above the previous half-year figure of 4.4 percent, all time record. The best houses, for which immediate offers are made, have almost always been rented at the asking rent or with minimal rounding up, in some cases required to compensate for the temporary increase in the amount of condominium expenses associated with rising heating costs.
Stable inventory times of houses that cannot find a tenant, just under 10 months.
The increase in rents does not stop, although at a lower percentage than in the first part of last year: on average they rise by 0.7 percent (+0.8 percent for the best houses, +0.4 percent for those in the first quartile). Top rents - maximum rents charged for individual units - remain very high, with values ranging from 670 euros per square meter inQuadrilatero to 515 in Magenta.
The relative weight of demand fromabroad increases further and stands at 30 percent. For residences of more than 250 square meters with highly prestigious features, the percentage is now by far the majority and around 75%. 3 out of 4 houses in the top segment are rented by foreign tenants or expats returning to Italy after long periods of foreign residence.
Forecast
In terms of buying and selling, unstable and uncertain conditions related to the turbulent international scenarios continue to influence the dynamics of domestic demand.
Less sensitive is the component from abroad, which is now largely prevalent in the top segment (> 3.5 mln euros), where further increases in asking prices are to be expected, which, if consistent with the quality of the houses, may be transferred to transaction prices.
Thus, a consolidation of the ongoing trend is conceivable, the real driver of which will continue to be the quality of supply.
We seem to pick up on some promising signs related to the top segment, in which potential sellers are beginning to enter the market who are interested in seizing opportunities to quickly and very profitably monetize their assets given the values expressed per sq. m. by the top transactions. This could provide some breathing room by allowing an increase in the number of transactions.
In leases, with demand likely to grow further, only a larger, better and upgraded supply will gradually lead to an increase in the number of leases and the level of rents.