Milan Real Estate Industry Research Analysis

2.0 – Introduction

This report will provide the key drivers of investment within the Milan market. The EXPO contributed a huge amount to Milan’s economy and Italy’s as a whole in 2015. It attracted millions of potential investors into Milan and was a huge success. However, the future of the space still has no settled plan. Therefore, this report will look into the potential for this space. It will finally look more widely into the commercial real estate market and recommend the most attractive investment opportunities from the findings of this report.

3.0 – Economic Trends & Drivers – Milan

This section of the report will explore the economic trends within the Milan economy. The aim is to provide a wider understanding of Milan’s economy and the impact it is having towards Italy. It will look into key statistics such as the population, GDP growth, infrastructure, and GVA. It will further look into projects which have been undertaken in Milan, within the last few years and future investment opportunities.

Milan is situated in Lombardy and has a population of 1.3 million people. The outer region has a population of 4 million. (Wilco, 2013) Milan is seen as the economic powerhouse of Italy. Unemployment in Italy is at a 10 year high at 12%. However, Milan is just over 8% as seen in figure 1.0. (Bertacche, 2015) Milan prides itself as a financial and business institution and well known for its fashion. With GDP in Milan being approximately €153.2bn, it generates nearly 10% of the national GDP with the Lombardy region, generating nearly 20% of Italy’s total GDP. (Expo-magazine, 2016) GDP per capita is much higher in Milan compared to the rest of Italy at $52,263 and compared to the Italian economy of $34,706. (Worldbank, 2014) Milan also featured 10^th among the ‘JLL EU cities’ in terms of purchasing power. (JLL, 2015)

Figure 1: Bertacche, 2015

Milan has a good infrastructure and is well connected with three international airports being less than one hour drive; Linate, Malpensa, and Bergamo. Milan’s underground is made up of four lines totalling 87.1km and has over 765 million passengers travelling each year. The line has been extended and station ‘Rheo Fiera’ was added to stop at the Expo. (Cittametropolitana, 2015) Busses and Trams are also a vital part of Milan’s public transport and it currently has 120 lines integrated within the City making it easy to get around the city. It is well located being in the North of Italy, it takes 55-minutes by plane to travel to Zürech. Milan is also situated within a two-hour plane journey of London, Paris, Brussels, and other top European destinations as seen in figure 2 making it an important hub in southern Europe. (fessh, 2015)

Distance to major European Cities:

Figure 2: Fessh, 2015

Milan has currently got seven universities with the Università Commerciale Luigi Bocconi being the highest ranked university in Italy and 5^th in Europe, making it one of the most prestigious Universities to study. (Unibocconi, 2015) It has six other universities and seven research centres. Milan has established itself as a fashion capital of the world ranking top in 2009 and being a top contender year on year, however, it slipped to 12^th in 2014. (Languagemonitor, 2014) Milan has the 2^nd largest Exhibition Centre in Europe covering 470,000 m² of floor space. It is used frequently, with more than 100 events held each year attracting 4.5 million visitors. These events also attract thousands of potential investors every year into Milan, increasing foreign direct investment.

Italy has not managed to have the strongest recovery out of the recession, however it is still one of the biggest economies in the world in terms of GDP. It is currently the 4^th largest economy in Europe and 8^th in the world. (Statisticstimes, 2015) Unemployment has been a huge problem in Italy, but it could fall as low as 8.7% by 2020. (TradingEconomics, 2016) The Italian economy hasn’t seen growth as an economy in the past few years, but Milan continued to prosper. Italy as a whole is predicted to see growth rates of between 1%-1.5% by 2020 which will be an improvement and should increase consumer confidence. (Knoema, 2015) Finally, investment volumes in Italy have grown 55% from 2014 to 2015, Milan accounted for €4,550m of €8,146m which is over half of the total investment in Italy. Figure 3 shows the importance of Milan as a market in the Italian economy, this large increase of investment was partly due because of the Expo and strengthening belief of the Italian economy. (CBRE, 2015) Furthermore, foreign investment strongly contributed to this having invested 42% more in 2015 than 2014.

Figure 3: CBRE, 2015

4.0 – The Expo Impact

An Expo is a global event that educates the public in sharing knowledge and innovation of a particular topic. Milan was the latest nation to host the Expo with the event named ‘Feeding the plant, energy for life’ the theme was promoting quality and sustainability of food around the world. (Europa, 2015) The exposition ran for six months from the start of May until the end of October 2015. The Expo had 142 countries participating with each country having their own exposition pavilion / construction to demonstrate their culture, architecture, traditions, and flavours. (Expo-elements, 2016) The Expo attracted over 20 million visitors with 25% of them being foreign visitor’s and the majority coming from China, US, Germany, and France. (Eulerhermes, 2015) The Expo was situated in the Northwest of Milan with a new metro ‘Rheo Fiera’ line built in order to reach the venue which covered 272 acres of land. The Expo cost over €3bn in infrastructure to build, however, it is estimated that it brought in €6bn in profits from tourism and gave the whole Italian economy a boost. (Eulerhermes, 2015)

The Expo was a beautiful demonstration of food culture and it also had a huge impact in the whole Italian economy. In the short term, it generated a value equal to +0.1% of Italian GDP in 2015. (Eulerhermes, 2015) The GDP growth rate in Italy has had four successive growth periods in a row which was certainly helped by the Expo as seen in figure 4.0, (TradingEconomics, 2016). Unemployment has also fallen by 1% in the past year in Italy and Milan is also following similar trends, (TradingEconomics, 2016).

Figure 4: Trading Economies, 2016

The Expo was a huge success for the Milan and more widely Italy. The area is currently being dismantled and countries have been given till June 2016 to vacate the area. There are worries that the area won’t be put to use. There’s yet to be a definitive plan of what the 272 acres of Expo area is going to be used for. Milan is encouraging for Investors to put the area to use and encouraging for major development of the site. (Asara, 2016) They don’t want to see the area be put to waste. It is likely that the government would subside part of the development as it would further boost Milan’s economy and create more jobs. Unemployment has been relatively high and this would help lowering it. The Expo area is already well connected with the city and has all the infrastructure needed in order for it to function. The original plan was to create an agricultural park with residential blocks, the research centres, and a National television production Centre. (Bianchini, 2015) However, there is currently a shortage in Grade A offices within the city and this area could be a perfect destination to develop new office buildings.

5.0 – Commercial Real Estate Investment Opportunities

This section of the report will focus on the commercial real estate market focusing on the office, retail, and industrial markets in Milan. It will further look into investor characteristics within each sector in the city and the recent purchases that have happened in the city.

The office market take-up in Milan in 2015 was 350,000sqm which was approximately 35% higher than 2014 as seen in figure 5. (CBRE, 2015) This was primarily because of the strong growth in Q4, which saw a 372% increase compared to the same time last year. New leases made up 26% of the total take-up compared to 12% in 2014. (Knightfrank, 2015) Take-up was driven by the financial sector taking up 26% of offices leased. There is currently a shortage in Grade A space in Milan with Grade B and C making up 78% of the available space. (CBRE, 2015) Prime office rents have been relatively stagnant fluctuating between €450 – €525 between 2005 – 2015 as seen in figure 6. (Cushman & Wakefield, 2015) The growth in rents will be very minimal in the next two years. Vacancy rates have fallen year on year between 2010 – 2016, due to the increase in demand in office buildings which simultaneously has led to a drop in unemployment in Milan. Vacancy rates are still relatively high at 11% and as new development becomes available within the next two years, it is expected that it will rise accordingly. Milan has been very stagnant compared to other major cities in Europe as in figure 7. (Cushman & Wakefield, 2015) This shows that the office market is struggling to recover from the recession, but it has seen positive growth in the past two years.

Figure 5: CBRE, 2015

Figure 6: Cushman & Wakefield, 2015

Figure 7: Cushman & Wakefield, 2015

The office investment market has been very strong within the past years and fundamentally being helped by the Expo. Prime office yields have been at a ten-year low reaching below 5% since the recession in 2007. (Knightfrank, 2015) This has been due to the significant amount of cross boarder investment which took 90% of the share of Milan’s office investment volume. Milan’s office investment volume passed the peak of 2007 in 2015 reaching nearly €3,000 million as seen in figure 8, (JLL, 2015). The biggest acquisition came from China’s Fosun Property which invested €345m on Palazzo Broggi in the heart of the city Centre. (Staff, 2015) The Italian office investment market looked very strong in 2015 and is expected to strengthen further in 2016. Portfolio transactions are going to be a key component to Milan’s office investment market in 2016. The start of 2016 has start will in Milan with AXA Investment Managers-Real Assets purchased the ‘Assago’ building in the south-western area of Milan for €24m which bought the building on the behalf of their clients. (Marchesini, 2016)

Figure 8: JLL, 2015

Milan is one of the top fashion cities in Europe and it attracts millions of tourist every year from around the world. The luxury shopping district is very clustered in five main parts of Milan; Via Montenapoleone, Corso Venezia, Corso di Porta Ticinese, Corso Vittotio Emanuele II, and Corso Buenos Aires (Which is Europe’s longest shopping street). (Scrivener, 2015)  It benefits largely from the international presence from retailers which make it very desirable. Italian consumer confidence seems to be on the rise, with it being at the highest levels since 2011 as seen in the figure. (CBRE, 2015)

Prime high street retail rents in Milan are €833sqm and there has been an 8% CAGR five-year growth rate. Shopping Centre’s retail rents are a lot more affordable, however less desirable at €71 SQ meter and a five year CAGR growth of 2.5%. (Cushman & Wakefield, 2015) Retail prime yields follow a similar pattern with high street currently at 4.75% and considering Milan 10-year low was 3.75%, it is performing relatively well. Shopping Centre’s prime yields higher at 6.5% and a 10-year low at 4.5%. (Cushman & Wakefield, 2015)

This shows even though Milan isn’t at its strongest high street retail, it’s still performing significantly well. This is due to the low availability of shops in prime locations in Milan. The five main shopping districts are the main driver for such good performance in the high street retail market. Prime retail assets in Milan don’t come onto the market often, due to long leases that retailers take. The low availability of prime retail stores means they are often overpriced and don’t always make a good investment opportunity.

The industrial sector has had the most difficulty throughout the recession and is still struggling. Industrial prime rents in Milan in 2015, where €4.25 sqm with a five-year growth rate of -1.5% CAGR. Prime yields in the industrial sector were the lowest in the main regions of Italy at 7.5%. (Cushman & Wakefield, 2015) Considering that Italy is the 4^th largest country in Europe, it lacks to compete in the industrial real estate market ranking in the bottom half of European cities in terms of industrial prime rents as seen in figure 9. (Cushman & Wakefield, 2015) The prime yield 10-year low in Milan was 6.25% showing that the industrial sector still had a lot to recover, as it currently stands at 7.5%. Prime yields in the industrial sector are relatively high across Europe with the exception of London and Zürich being under 6% as seen in figure 10. (Cushman & Wakefield, 2015) However, high yields offer a better long term investment opportunity. The Milan real estate market constitutes mostly of retail and office buildings in the commercial real estate sector and there is limited availability in industrial stock.

Figure 9: Cushman & Wakefield, 2015

Figure 10: Cushman & Wakefield, 2015

 The long-term industrial real estate could become vitally important for cities around the world. E-commerce sales are growing on a daily basis and warehouse space is needed in order to keep down postal costs and improve delivery rates across the world. E-commerce sales grew to $19bn in 2015 in Italy and it’s expected to rise to $23.53bn by 2017. (Statista, 2016) Amazon launched ‘Prime Now’ in Italy in Piacenza which is a service which provides delivery within one hour. (Ecommerce news, 2015) With rising demand in Italy in the e-commerce sector, Milan will certainly take advantage of services and companies such as Amazon and might invest in stock closer to the city centre in order to provide a quicker service for its customers.

6.0 – Comparative Assessment

Milan and the Lombardia region are a key area of investment area. In 2014 it attracted 46% of total investment which was over €1bn as seen in figure 11. (Researchcentral, 2014) The majority of the investment went into office and retail. There has been a shift in investment pushing further into the office sector due to the strength of this sector. Industrial investment has remained relatively weak, but picked up between 2013 – 2015 seeing a year on year rise. But in comparison to office and retail, it has not managed to attract a significant amount of investment due to the limited availability. Domestic investment has slowed down in recent years and there has been an increase in foreign investment. (Researchcentral, 2014) Investments, such as the purchase of Palazzo Broggi have helped strengthen international presence in both the Italian market and more importantly Milan.  The Expo as discussed above would have also been a key contributor to the increase in investment with the aim of attracting further investment to develop the ‘Rheo Fiera’ region in the near future.

Figure 11: Researchcentral, 2014

 As an investment opportunity, Milan is becoming a very attractive proposition, especially within the real estate sector.  The most attractive opportunity presented in this report is an investment in the Office sector in Milan. Prime rents, been very flat in the past ten years and growth is predicted to be relatively stable within the next two years at around 3%. The figures which make the office market stand out is the non-domestic demand, which has helped achieve the highest investment volume since 2006. The Office market attracted nearly €3,000m in investment and it continued to thrive in the start of 2016. The Expo area has got 272 acres of land that need development. Furthermore, 78% of the offices currently available are grade B and C. Development in the Expo area might even get government subsidisation to investors as they wouldn’t want to see the area go unused. This represents a great opportunity to provide Grade A offices in the Expo area, which already has all the infrastructure needed in order to thrive. It will also provide with a less dense area for organisations looking for a more open space for their employees.

The second investment opportunity would be in the industrial sector in Milan. This would be a riskier investment due to the performance of this sector within the past few years. The sector has seen -1.5% CAGR 5-year growth. It also has one of the lowest prime rents and the highest yield amongst the major cities in Europe. This represents a great long term investment opportunity as the industrial value is most likely under valued. It has seen a year on year growth on investment volume and trends are predicted to continue within the next few years. The biggest opportunity lies in the increase in demand in the ecommerce sector, which should drive industrial prices up in the long term.

To conclude Milan has become a very desirable place for investors, especially for non-domestic investors. This has been partly due to the Expo as it attracted millions of potential investors from around the world into Milan. Italy is also expected to improve as an economy, not dramatically, but it should see positive growth within the next few years as consumer confidence rises. Commercial real estate has been a popular investment for people and companies all around the world. Milan is expected to receive further investment as new development is coming onto the market and demand to invest in one of the major European cities increases.

7.0 – References:

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