The time is ripe for speculative development to return to Milan.
Construction has been virtually nil for years. Modern product is scarce and vacancies are at record lows. Cash-rich investors are in search of higher returns.
Whether securing new projects or redeveloping outdated buildings, international players of all shapes and sizes are putting up money on development and filling up the gaps left by local builders, most of which collapsed during the global financial crisis.
Just this week, US-based investment manager King Street Capital Management emerged as the buyer of an office building at Milan's viale Fulvio Testi 280 with plans to redevelop and extend it over the next three years.
King Street, through the newly-launched Whitemoon closed-end fund managed by Italian asset manager Kryalos, is believed to be investing €50 mln to buy the property from German fund manager Commerz Real with plans to spend another €50 mln to renovate the building.
Built in 1989 and last refurbished in 2005, the property currently provides 16,400 m2 of space and 355 car parking spaces in the Bicocca sub-market of Milan. Its occupier, Italian telecom firm Fastweb is due to vacate it by March 2019 giving King Street an opportunity to start construction in the near term. The asset will target Leed Gold sustainability certification and will offer 33,000 m2 of office space on 13 storeys following redevelopment which is due to complete by 2020.
The operation is the second development planned by King Street in Milan. In May, the US investor bought another asset at via Gattamelata from Generali Real Estate with plans to demolish it and transform it into a 33,000 m2 Leed Gold-certified office complex. King Street's Pharo development project is planned for delivery in 2020.
To the south-west of the city, near the Bisceglie train station, construction is due to kick off next year for a €250 mln mixed-use development project encompassing a total of 140,000 m2 of space. The main investor behind the project is US private equity group Värde Partners, which recently took a 90% share from the site owner, local builder Borio Mangiarotti, which is retaining a 10% stake.
Dubbed Seimilano, the operation is believed to be the first greenfield development launched by Värde in Italy as well as one of the first real estate development joint ventures ever signed in the country between an international party and a local developer. The project comprises over 1,000 residential units, 30,000 m2 of offices and 10,000 m2 of commercial areas, all set within a major urban park.
Development JV
Another massive project funded by international capital is Milano Santa Giulia, which Australia’s Lendlease agreed to re-launch following prolonged financial troubles by its original sponsor, local developer Risanamento. The project, which is expected to cost around €1.2 bn, adds to Lendlease’s commitment earlier this year to another development operation in Milan, the 1.2 million m2 regeneration of the Expo 2015 area following the universal exposition held by the city three years ago. The project encompasses a new Statale di Milano university building, student housing facilities, a hospital and a vast range of commercial spaces.
Similarly, US firm York Capital Management earlier this year agreed to take over and fund the Porta Vittoria project after its main sponsor, local real estate entrepreneur Danilo Coppola was declared bankrupt.
Värde, King Street, and Lendlease are three of a string of international players which have recently taken on development projects or are seeking to get access to development in Milan. Other US-based players including Blackstone, Starwood Capital, Lone Star, Hines, Goldman Sachs and Cerberus are also believed to be on the lookout for opportunities in the city, along with European real estate private equity group Orion Capital Managers, sovereign wealth funds GIC from Singapore and ADIA from Abu Dhabi, according to market experts.
‘We are convinced that a dynamic occupier market in connection with a limited availability of Grade A space, a positive outlook for the rental market and a scarcity of big local builders have pushed several important real estate players with development expertise towards this type of investment,’ says Carlo Vanini, head of capital markets Italy at C&W.
Opportunities abound. Just to mention a select few over 100,000 m2, a consortium led by local developer Bizzi & Partners is believed to be looking for an international equity partner for the massive Falck industrial site in the San Giovanni district of Milan. The site, encompassing over 1 million m2, is due to house the new medical centre of the Lombardy region.
To the south, family-owned developer Cabassi is planning over 300,000 m2 of mixed space in Rozzano near the Milanofiori shopping centre, while the Berlusconi-controlled Fininvest holding group is looking for a co-investor to expand the Milano 3 site in Basiglio by a further 70,000 m2. Similarly, gaming group Snaitech is looking for a buyer for a number of greenfield sites part of the former San Siro racecourse.
‘Milan currently offers several major redevelopment opportunities but there aren’t many local builders prepared to take them on,’ says a market expert who wishes to remain anonymous. ‘Which is why the arrival of international parties with development expertise is key to enable the market to grow.’