Europe's luxury housing squeeze

Prime residential transactions in Italy surged 140% year-on-year during the eight months through August, according to new Knight Frank data, highlighting the government's success in attracting wealthy individuals with large overseas income and assets. 

Italy's flat tax regime, which allows individuals who transfer their tax residence to Italy to pay a fixed €300,000 a year on foreign income for up to 15 years, now has 5,000 participants - up from 3,000 two years ago. The country is increasingly viewed as an attractive longer-term base rather than simply a holiday-home destination, while our agents report a growing trend of existing owners expanding their Italian footprint beyond a single home, combining city, coastal, lake and mountain lifestyles.

The geographic distribution of deals has also broadened. In 2025, around 80% of completed prime residential transactions with Knight Frank were concentrated across Tuscany, including Lucca and Chianti, and the Lakes. In contrast, 2026 has seen greater activity in Rome and Milan, alongside completed transactions across Tuscany, Lucca, Liguria and Venice. The forward pipeline extends into Sardinia and Lake Como, as well as Alpine locations.

Hunting for sites

A shortage of homes that meet wealthy buyers’ expectations could constrain further growth. This is particularly important in Milan, where international buyers dominate at the top end. A handful of luxury hotel brands have been hunting for sites for several years, but – as in many of Europe’s key cities – suitable properties are scarce. Regulations are strict, and the technical requirements of branded residences - including corridor widths, facade specifications and minimum floor areas - rarely align with available buildings.

Dorchester Collection became the first to announce a project in July; its restoration of the Hotel Principe di Savoia will include “a limited collection” of private residences. At least two more brands are likely to announce projects in the next 12 months, Knight Frank's Mark Harvey told The Residence Report 2026/27 (p.16). 

This is the dominant theme in Europe's prime property markets. Madrid and Paris, also increasingly popular with wealthy buyers, face similar constraints to Milan, albeit to varying degrees. In Paris, as many as 15 funds and developers are circling the market looking to bring branded or serviced residences to the city, many targeting historic office buildings – but few are large enough to make it work, Alison Ashby, Knight Frank’s Head of Paris Prime Residential told us. One project facing the Eiffel Tower, set to be announced within the next year, is expected to set a new price-per-sq m benchmark by offering freehold ownership and services provided by one of the world’s leading luxury hospitality brands.

In Madrid, developers are skirting constraints by relying on converting former office buildings, as is the case with Lamar Development’s Casa Lamar Cedaceros 9. The former insurance office will have 22 residences designed by Patricia Urquiola, starting at €2.3 million (US$2.6m). Three more similar projects are coming, including Paseo de Recoletos 14, the former headquarters of insurance company Mutualidad, and the Palacio de Gamazo on Génova 26, previously the HQ of insurer PSN. Both were purchased by Madrid-based Terralpa, according to reports in trade publications EjePrime and El Inmobiliario mes a mes. Meanwhile, in summer 2025 Swiss bank Pictet and Spanish investment manager Blasson, the duo behind the Mandarin Oriental Residences in Barrio Salamanca, purchased Goya 14, the former seat of Spain’s National Court.

Deep water

The shortage of suitable buildings is largely an urban problem. Away from Europe’s major cities, developers have more freedom to build from scratch, and branded residences are increasingly being used to establish new luxury destinations. 

Porto Heli, on the eastern Peloponnese coast of Greece, is among the best examples. About two hours by road from Athens or a short journey by yacht, the former fishing village is underdeveloped relative to the Cyclades or Ionian islands, and its deep natural harbour is well suited for superyachts. Six Senses is developing a private bay into a hotel with 60 rooms and suites and 12 branded residential villas with up to eight bedrooms, due for delivery in 2028. The company will join Four Seasons, which is building a new resort with 80 rooms, 30 bungalows and branded villas on 185 acres at nearby Hinitsa Bay, due for delivery in 2027.

Other hotspots identified by The Residence Report include Comporta, which has shed its up-and-coming status to become one of Europe’s most coveted seaside destinations. New development permits on the 65km coastline are capped by environmental regulations, keeping the pipeline tight, but Six Senses is delivering a 70-key hotel and 58 branded residences priced from €2.8 million (US$3.2m) due for delivery in late 2028. Sales began in May.

Meanwhile, the clamour for new sites isn’t limited to the coast. As operators expand across Europe, their attention is also turning to alpine destinations, where branded residences remain relatively rare but demand for high-service second homes continues to grow. Kerzner International’s One&Only will open its first resort in the French Alps in 2030. The group will redevelop the site of the historic Courcheneige Hotel in Courchevel into a wellness-led resort, alongside branded residences.

A valuation headache

Last Saturday, The Times reported on its front page that the government may lower the bottom threshold for the higher-value council tax (HVCT) to £1.5 million from £2 million in the Autumn Budget.

This was already going to be a headache for valuers: 73,600 properties worth between £1.8 million and £2.2 million fall into the grey area on either side of the proposed bottom threshold. If that dropped to £1.5 million, the grey area would expand to 222,800 properties, trebling the size of the valuation headache, according to Knight Frank figures. You can read more here.  

As is always the case, you can piece together the upcoming Budget during the preceding weeks as officials leak information to the papers. The government has canvassed investors to see how much headroom it can get away with without spooking the bond market, according to the FT. A figure as low as £15 billion could be enough, according to one official quoted in the report. Meanwhile, business leaders have warned on the impact of proposals to raise capital gains tax, and billionaires are pushing back on HMRC's efforts to learn more about their financial affairs. 

Haven't got time for all that? Learn everything you need to know in a new episode of our Housing Unpacked podcast, in which Tom Bill speaks to James Nation, former special adviser to Rishi Sunak at the Treasury. They unpack the wave of pre-Budget speculation around a lower mansion tax threshold and a possible capital gains tax rise. They discuss why this year's rumours may not be genuine Treasury trial balloons, how much financial headroom John Healey actually needs to rebuild, and which of the widely-touted tax options would truly surprise James. They also cover the prospects for Help to Buy's return, the case for extending National Insurance contributions to landlords, and what to watch for from Healey and Burnham at Labour conference next week.

In other news...

US mortgage rates breach 7% as affordability pressures mount (FT), Luxury Hotels Are Getting Tiny — and That’s the Point (Bloomberg), Euan Blair: Tax burden could cripple growth (Times), and finally, Bank of England rate setters warn of 'sparks in the tinderbox' (Reuters).