Milan Real Estate Prices Surge as Billionaires Buy In

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(Bloomberg) --

Real estate investors from Azerbaijan’s sovereign wealth fund to Blackstone Group Inc. and UBS Group AG are cashing in on a surge in demand for prime Milan offices that’s pushing prices to new highs.

A lack of development in Italy’s financial capital is driving up rents just as a scarcity of prime real estate in some western European cities encourages global investors to enter new markets. The billionaire Rovati family, Amundi SA and Invesco Real Estate are all closing in on deals to buy up trophy office buildings in the city, people with knowledge of the transactions said, asking not to be identified because the discussions are private.

Italy’s real estate market endured a long period of subdued activity after the global financial crisis because banks were slow to clear up soured property loans, reducing the availability of credit. At the same time, investors were focused on European cities where economic growth was stronger and political risk lower. That pushed prices in major markets like Paris, Berlin and Frankfurt to record highs, making Milan look cheap by comparison.

According to people familiar with the negotiations, these are some of the deals currently in the works:

  • The State Oil Fund of the Republic of Azerbaijan is close to selling Palazzo Turati to Invesco for about 112 million euros ($126 million)
  • Amundi is in talks to buy a building on Via Gustavo Fara from UBS for about 50 million euros
  • The Rovati family is close to agreeing the purchase of Piazza Cavour from DeA Capital Real Estate Sgr SpA for about 170 million euros 
  • Blackstone is offering for sale the new Milan headquarters of Goldman Sachs Group Inc. on Via Santa Margherita, seeking bids of more than 100 million euros

Talks continue on all of these deals, and there is no certainty the sales will be completed.

A DeA Capital spokesman said the competitive process for the property on Piazza Cavour is ongoing. Representatives of UBS Asset Management’s real estate unit, the State Oil Fund of the Republic of Azerbaijan, Invesco, Amundi, and Blackstone all declined to comment. A spokesperson for the Rovati family didn’t respond to requests for comment.

“Despite the macro situation, Milan is not Italy, and actually there is very little true grade A vacancy anywhere within the central business district,” said Max Nimmo, an analyst at Kempen & Co. “This is putting upward pressure on rents, and despite the already quite low yield, investors are willing to buy that growth.”

Annual rents in Milan reached 585 euros a square meter in the first quarter, up 1.7% from a year earlier, while vacancy rates declined by about half a percentage point, according to data compiled by broker Jones Lang LaSalle Inc. That followed a record year for leasing in the city in 2018 when about 381,000 square meters (4.1 million square feet) was rented, according to CBRE Group Inc, another broker.

“Demand is capped by the limited availability of good quality products, so we expect yields to remain low or slightly decrease in the coming months, particularly for quality grade A assets,” said Gabriele Bonfiglioli, head of investment management at Milan-based landlord COIMA RES SpA. “In terms of capital values Italy, and Milan in particular, is lagging behind other European markets. Prime capital values in Milan have a discount to Paris of about 50%.”

Prime yields, a measure of annual rent compared with a property’s price, are about 3.6% in Milan compared with 3% in Paris and Amsterdam, 2.95% in Frankfurt and 2.9% in Berlin, JLL’s data for the first quarter of 2019 show. The latest deals are likely to set a new prime yield for Milan, with the Piazza Cavour sale price reflecting a yield of about 3.4%, the people said. A higher yield indicates a lower price relative to rent.

©2019 Bloomberg L.P.

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