Exclusive Residences Observatory - Second Half 2023 - Press Release
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EXCLUSIVE RESIDENCES IN MILAN: DESPERATELY SEEKING HOUSES
Tirelli & Partners Benefit Company presented today the Luxury Residences Report, featuring data from the second semester of 2023. Dedicated to those who want to better understand and invest in the dynamic Milanese market, it serves as a reference point, concluding its twentieth year of existence with this publication.
Demand and supply
The strong segmentation of demand, already highlighted in the last two semesters, continued into the second part of 2023. In the Top tier (over 3 million), there is still a substantial demand ready to immediately convert into purchase proposals when it encounters the right product. Even in the Lower range (between 1and 2 million), demand is present and active, while in the Middle tier,(between 2 and 3 million) behaviors characterized by wait-and-see and caution, mainly dictated by considerations regarding the current economic situation and expectations for the future, have prevailed. Overall, the market shows transactions in all three price ranges, albeit with different modalities and 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 tier, transactions happen suddenly; in the Lower tier, rapidly, while the Middle tier is more gradual," comments Gabriele Torchiani, senior partner in charge of the Report.
The Top segment is consistently driven by inquiries fromabroad (foreigners and Italians returning) that accumulate in databases of real estate agencies as they are grapple with a limited and often inadequate supply in terms of quality. The result is an extremely thin stock, as never seen before in Milan. In the Middle segment, the demand is mainly local, aimed at improving one's current housing situation. The scarcity and difficulty of finding an improved offer compared to the present, coupled with the higher cost of credit, lead to a lengthening of decision-making times. In the Lower segment, the demand is both local (aimed at first homes) and Italian, and therefore geared towards investment. In this case as well, the supply of quality is still lower than the demand, while at the same time, there are many unsold houses due to inadequate quality.
The qualitative insufficiency and quantitative limitation of the supply are dictated by multiple concurrent factors:
- The rush to purhcase that occurred in the post-pandemic period reduced the existing stock in numerical terms, but even more so in terms of quality, considering that this demand was primarily aimed at adding livable outdoor space to one's home.
- The exponential increase in demand from foreign or returning Italian buyers, driven by dedicated fiscal benefits, has depleted the stock of homes in the Top tier. In thi segment, in fact, over 50% of transactions come from these categories of buyers, a demand completely absent before 2019. Considering that the level on "internal" demand (from Milanese residents and those moving from other parts of Italy to the city) reasonably remained unchanged during this period, it follows that for at least 4/5 years, the number of transactions in this market has doubled compared to 2018.
- A highly motivated and rapid decision-making demand has increased off-market transactions, which, by not passing through the usual channels, also distort the perception of the available stock of homes.
- The resurgence of an inflationary wave after two decades has directed a significant amount of financial resources towards real estate investments , especially in Milan, a city that has managed to create an image of great success.
In general, during the semester, the number of transactions has decreased, despite the substantial stability of the absorption 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 data summarizes situations that are very widely. Indeed, transactions involving high-quality properties materialize very quickly, often off-market, without discounts or with minimal price adjustments, resulting in mutual satisfaction ofor both parties. The lower-quality offering, which generate less interest, must necessarily go through the "official" market and, in the case of a long period without finding a buyer, will likely have to discount prices to become attractive.
"Considering that in 2021 and 2022, the average discount was around 5.2 percent, the increase clearly shows the growth of transactions in the second group compared to the first, confirming the thinning of the stock of high-quality properties," comments Marco E Tirelli.
Properties with inadequate quality continues to languish on the market without finding a buyer. As a confirmation of this, the average storage times for residences that do not find a buyer continues to grow, exceeding two years.
Despite the scarcity of supply, the dynamics of the asking prices remain healthy, showing small fractional increases. If in the smaller territorial zones like Quadrilatero and Porta Venezia, trend values remain around parity due to the extremely limited number of new listings, while Brera and the "Other Zones" (the latter lbeing a logical entity grouping houses with prices above 1 million euros outside the individually mentioned zones), show average increases of 0.3%.
In the semester, the average asking price is essentially stable (+0.21%), while the maximum average (houses in the last quartile of the statistical distribution of prices, those of higher quality) records a very slight negative sign (-0.05%) after several semesters always marked by a positive sign. In this case as well, confirmation of the extremely limited impact of new supply in the semester.
The Top price per square meter for a single residence exceeds €20,000 per square meter in all five specific zones surveyed (and goes beyond €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 does not raise particular concerns. Milan maintains and improves its attractiveness for those who decide to make it their residence and for investors seeking adequate returns and assets that guarantee the maintenance of their value in the medium to long term "-says Gabriele Torchiani. "Compared to the average of the Italian real estate market, Milan's prices appear out of scale, but it is the term of comparison that is incorrect. Milan is among the major European cities, and exclusive residences in the city have lower per-square-meter values compared to them."
"Only for London there are reasons for international attractiveness that justify this price gap with Milan," - adds Marco E. Tirelli. "The main reason for this gap in the Super Top tier (over 6 million) is iindeed the total absence of an offer with international quality standards. As with any luxury product, it is the offer that creates demand, not the other way around."
The total amount of the three most significant sales of the semester standsover 22 million, with selling prices per square meter ranging from 13,000 to over 20,000 euros.
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.
The interest in Milan for foreigners remains at high levels, and prices are still considered fair and often favorable when compared to their cities of origin and other European 'competitor' cities.
Leases
The rental market continues to be driven by strong demand,often characterized by immediate needs. The primary demand, driven by medium to long-term housing needs, is complemented by secondary demand, related to the temporary housing needs of those looking to purchase a home but are unable to do so immediately due to a lack of supply and, for some, the burden of accessing credit. The demand comes from both Italian residents and foreigners or expatriates choosing to return to Italy for work or tax-related reasons.
"In the High-end segment - i.e., those earning over 100,000 euros annually, excluding condominium expenses - requests significantly surpass the available supply, especially for apartments with rents exceeding 15,000 euros per month " - comments Gabriele Torchiani. "In both cases, the requests are focused on residences in immediately habitable condition."
Even in the Lower and Middle segmest, the rental supply remains largely insufficient, also due to the shift of some recently renovated properties towards the short- and mid-term furnished segment, potentially attractive in terms of expected returns.
The percentage properties leased out of the total on the market continues to grow in the semester, averaging 35.5%. In Brera and the "Other zones" the absorption index exceed 40%. In the other surveyed areas, lower values are recorded, mainly due to the presence of a substantial portion of unrestores houses still in stock.
Many houses that do not find a tenant remain on the market not so much due to the level of rent requested but rather because of inadequate maintenance. The increase in tenant mobility, even with 4+4 contracts, often leads to contract terminations before the end of the first four-year term, directing demand only toward renovated homes with fresh panit and newly furnished bathrooms and kitchens.
The average rental times remain below 4 months(3.8) : beautiful and renovated homes do not have to wait long to find a tenant. The average discount also stays close to 4%, a result of active demand and a deficient supply. This value is 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 often close to or exceeding 10% compared to the asking price for second-tier homes. At 9.2 months - a slight decrease - theaverage stock holding for houses that do not find a tenant.
The rent increase trend continues, averaging a 0.66% up: strong
(+1.03% for the best moes, +0.42% for those in the first quartile). Top rents - maximum rents requested for individual units - remain very high, with values exceeding 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.