Luxury Residences Report - I Half 2024 - Press Release
EXCLUSIVE RESIDENCES IN MILAN
QUALITY MAKES THE DIFFERENCE, AND PRICES IN THE LUXURY SEGMENT REACH THEIR PEAKS
Tirelli & Partners Società Benefit presented today the "Luxury Residences Report (ORE) featuring data for the first half of 2024. Since 2003, the ORE has been a reference point for those who want to understand in depth the dynamics of Milan's luxury market.
Sales
The Demand for residences in the Top (between 3 and 6 million) and Luxury segment (over 6 million) is always very active, primarly driven by searches from abroad (Italians returning home and foreigners mainly motivated by tax considerations). The relative supply is always very limited in number and often inadequate, but the few high-quality homes quickly find their motivated buyers.
In both the Low segment (between 1 and 2 million) and Medium segment (between 2 and 3million) demand has been more cautious, especially where domestic buyers prevail. In these cases, and where there are no particular urgent conditions, a wait-and-see behavior prevails, driven both by a general climate of uncertainty and the difficulty of finding an offer that is genuinely improves the current situation.
In all three segments, the focus of demand is therefore always on the quality of homes. Where quality is high, transactions still occur fluidly, albeit at different speeds: very rapidly in the Luxury/Top segment; rapidly in the Low segment; and more slowly in the Medium segment.
Regarding new real estate developments, the market suffers from a significant reduction in supply, caused by the halting of some projects and the freezing of new approvals following the well-known issues that the "Salva Milano" decree should have addressed long ago. Part of the demand has shifted its focus to the secondary market, the resale market. However, due to both the qualitative gap and the emotional divide that digital technologies have created in favor of new developments, the increased attention to the secondary market has not automatically resulted in a corresponding increase in the number of transactions.
In fact, the number of transactions is clearly declining, as is the absorption rate, which has dropped by 3.5% on average, with a sharper decline in Brera, where quality homes are even scarcer than elsewhere.
Some owners, often attracted by transaction values in the Top segment or those in the new segment, aspire to values well above what is credible in relation to the quality perceived by the market. Homes thus build a story of failure in the market, which attempts to remedy with successive multiple price reductions (made transparent to buyers through to web portals) even during the first 30 to 60 days on offer. "This makes price dynamics very confusing and even generates expectations in the market of further future reductions, reinforcing the deferral of decision times" comments Gabriele Torchiani, senior partner in charge of the Report. "On the other hand, in the Top segment, the price dynamics are very clear and strongly increasing, either because they are driven by decisions of individuals with significant spending power and tax advantages due to the incentives granted to them, or because homes in this segment often belong to the ones that cannot be missed," add Marco E Tirelli.
The trend in average closing time for purchases and sales is affected by the general slowdown in the segment: it is back above 6 months (6.2) after 4 years spent below this threshold, with the lowest of 3.8 months recorded in the first part of 2022. The discount grows fractionally (+0.5 percent) to 6.7 percent.
It is therefore clear that, in the last two years, something in the market has changed. On one hand, the Luxury segment continues to close transactions at asking prices with very short times, while the majority of transactions fall into one of these three categories:
1. High-quality homes, which however require longer decision-making times due to the asking price level (Top segment);
2. Good-quality homes, which take longer to find buyers compared to the past or are sold with a discount on the asking price (Medium and Low segments);
3. Medium/good quality homes, which only find buyers after extended time on the market and with significant price reductions.
The supply featuring low quality continues to languish, with minimal chances of finding a buyer. Confirming this, the average time on the market for unsold residences continues to increase, reaching nearly 27 months.
The dynamics of asking prices still show fractional increases (+0.69% for the average price, with a slightly more pronounced increase for used homes at +0.9%). It is clear that the index, referring to the entire segment of exclusive residences as a whole, is influenced by the properties that make up the bulk of the stock, particularly homes between 1 and 2 million euros. In this segment, the increases/decreases from one semester to another do not show, except in extreme cases, large variations. The index is also weighing down on one hand by the limited percentage of new entries on the market compared to the existing stock, and on the other hand by the confusing price dynamics described above, which leads to reductions in initial asking values even in very short times. Confirming this, the number of residences on the market that have undergone a price reduction during the semester has increased by 25% compared to the previous period.
However, the overall price index hides a very significant phenomenon referring to the niche of houses in the Luxury range (price greater than 6 million). "Over the past 5 years, this market has been characterized by a significant rise in the maximum prices per square meter (ed. note the highest value per sq. m. required for a single real estate property)" - comments Marco E. Tirelli. "The most striking figure in absolute value concerns the Quadrilatero area, which has always been the most sought-after location in the city, where the top price per sqm has risen from 25,000 euros in 2021 to more than 37,000 euros in the first half of 2024, but this is a cross-sectional phenomenon in the different areas of the city that simultaneously reflects the increase in demand and the significant shortage of supply."
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These values may be unexpected by the public and are justified as they refer to exceptional properties purchased by individuals accustomed to similar or even higher prices in the world's major capitals. Certainly, to reach these levels of price per square meter, each residence must have superior location and quality characteristics, but where these are met, buyers are ready to purchase, even in a short time.
The level of prices does not raise concerns, as further confirmed by the latest UBS Global Real Estate Bubble Index report published on September 23rd, which assigns Milan the lowest bubble risk in Europe (and second in the world only to São Paulo, Brazil).
"The reasons lie mainly precisely in a "healthy" price dynamic, which has not experienced unmotivated jerks over the years, and in the circumstance that Milan is constantly improving its attractiveness both for those who decide to make it their residence and for investors who seek adequate returns and assets that give a guarantee of maintaining their value in the medium to long term," Torchiani says.
The total amount of the three most significant sales of the semester stands at over 26 million euros, with sales prices per square meter ranging from 14,500 to over 30,000 euros.
The percentage breakdown among reasons for purchase remains largely unchanged from the second half of 2023: the "first home" component is worth 55 percent, incorporating also transactions related to buyers from abroad. The "replacement" portion is worth 38 percent of the total, and the investment portion rises slightly to 7 percent.
"The interest in Milan by foreigners remains at a very high level " - confirms Marco E Tirelli. "This is highlighted by the fact that a large majority of those who have opted for the particularly favorable Italian "'lat tax' regime chose Milan as their residence location."
Several factors underpin this choice:
1. In the global context, prices of exclusive residences are considered "fair," and bubble risk, as mentioned, is perceived as minimal;
2. 2026 - the year of the Winter Olympics - is approaching, and the city's recognition and attractiveness will be further amplified, as was already the case thanks to Expo 2015;
3. It is the true "15-minute city," a "human-scale" city where almost 90% of the most desirable residential locations are located less than 1.5 km from the city's physical center;
4. The perceived quality of life is very high: Milan combines European scale offering in terms of work, education/university, culture, healthcare, etc. with the renowned Italian quality of living.
Leases
A very active demand continues to characterize the rental market for exclusive residences in Milan in all areas, zones and segments. Potential customers are now almost exclusively turning to recently renovated, semi-furnished (kitchen and closets) or furnished solutions. This is because what prevails today is the secondary demand, the one related to covering temporary needs, even for those who are looking for a home to buy but struggle to meet that need in the immediate term. The demand comes as much from Italians who are already residents as it does from foreigners or expats who choose to return to Italy for work or tax reasons. Even the primary demand - that linked to more permanent and stable needs - now expresses contracts that, although formally 4 years with a renewal option, actually have an average duration of less than 3 years, due to the changed social dynamics linked to the higher rate of international mobility of people.
In the High bracket-over 100,000 euros per year (excluding condominium expenses)-requests significantly exceed theavailable supply , and the situation worsens for apartments with rents over 180,000 euros (Top bracket). In both cases, requests are for perfect residences with great scenic appeal.
Even in the Medium and Low segments, the rental supply remains insufficient, despite a return to the market of an small (but indicative of an ongoing trend) number of properties that were previously circulating in the short-term rental circuit, whose expected returns have been largely reached by those obtainable for furnished homes under traditional 4+4 contracts. As mentioned, the actual duration of tenant occupancy will, in most cases, be less than 4 years, but lower management burdens and less intensive and wear-and-tear use of the home are convincing owners to return to the "traditional" segment at the same level of obtainable net income.
Still growing on average in the six-month period is the percentage of rented properties out of the total number on the market: theabsorption index reaches 36.6 percent. In Brera and the "Other areas" it exceeds 40%. Lower values are recorded in the other areas surveyed, mainly due to the persistence in stock of a substantial share of unrenovated houses. These are often owned by institutions or households that are very reluctant to make the necessary investments in renovation without first identifying a tenant.
Still very positive average values for average lease times, which are just above the record high in the first half of 2023 (3.6 months): nice, renovated homes do not wait long to find a tenant, and if they are still being renovated, contracts are often formalized before the work in progress is closed.
"On the other hand, a new all-time high is marked by the average discount, which falls to 4 percent, a value that is the result of active demand and deficient supply and represents the average between the zero discount of the best residences - for which owners often have more than one bidder to choose from - and the second-tier residences that, in order to be rented, must accept offers with a discount often close to 10 percent compared to the demand," Torchiani adds.
At 9.4 months - in slight increase - the time on the market for homes that do not find a tenant confirms that what is discarded today does not become interesting tomorrow.
The upward trend in rents continues, rising by an average of 0.65%, and the process of dividing rents according to house characteristics also continues. The best ones on the market (those in the last quartile) mark +1.02% while the average +0.42% of those in the first quartile also hides within it three fractional declines (Centro storico,Magenta and Porta Venezia). Top rents per square meter - maximum asking rent per square meter - exceed 500 euros in all areas of the city.
The proportion of demand from abroad currently represents about one-third of the total, although for residences over 250 square meters with prestigious characteristics, three out of four are rented by foreign tenants or expatriates returning to Italy after spending long periods abroad.
Forecast
As for sales, in the Low segments, demand and the number of transactions are expected to remain stable, if not slightly growing. Stock markets are at their highs, and the decline in interest rates may continue to channel resources into this segment for investment.
The Medium segment will continue to be influenced by uncertainty related to the increasing turbulence of international economic and political scenarios, and thus, cautious behaviors may still prevail, preventing the market from significantly shining terms of transaction volumes.
On the contrary, in the Top segment, characterized by strong international demand and a consistently thin product supply, further increases in asking prices are anticipated, despite the doubling of the flat tax amount to €200,000, which will have no impact on the number of applications due to the significant convenience of this tax regime even at the new level. However, considering the size of this segment, which has negligible annual transactions count in percentage terms, this would statistically have a non-significant impact on overall average prices.
"It seems important to me to consider the impact that the dissemination of information (true or alleged) about the high values achieved by transactions in the Luxury segment may have on the remaining part of the market. This is a phenomenon that we have already observed in the past and to which we have given the name 'accordion effect.' Just as by raising an accordion on one side, the other side initially follows the upward movement and then returns to its initial level, so in the past an increase in Top transaction prices has been followed by a general rise in the level of sales prices demanded by owners in the lower ranges or those in the same range but with lower quality homes. In our experience this has never led to a real increase in actual sales prices, but rather induced a partial stagnation in the market resulting from the substantial distance between the expectations of owners those of buyers," explains Marco E Tirelli.
We should therefore hope that, with the assistance provided to property owners by real estate agents, asking prices will continue to reflect the actual quality of the homes, and that sale prices remain largely stable as a result. Otherwise, it is reasonable to expect an increase in transaction prices in the higher segments of the market, especially in the Luxury segment above 6 million.
Regarding the number of transactions, since the quantity and quality of the available stock remain the main drivers of this market, we expect a decline in the short term. In the Top segment, there are signs that the thinning of supply, which has been ongoing for at least 2 years, may have reached its minimum. In the past semester, on the one hand, some transactions were registered that occurred completely off-market; on the other hand, the price levels reached in this segment promises interesting returns to owners who have unused homes. In this sense, with strict confidentiality, some have begun to probe the market.
On the rental side, 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, however, it will be difficult to observe an increase in the number of leases. Rents may rise further, especially for furnished units, driven by at least three factors:
1. The ongoing thinning of the available stock semester after semester;
2. The current level of rental rates in the Top and Luxury segments, which, from the perspective of foreign demand, still remains significantly lower compared to that of competing cities;
3. The ongoing trend of 4+4 lease rates converging toward those demanded for mid-term rentals.