MILAN, Jan 12 (Reuters) - Italy's property market could outpace other European countries in 2026 as political stability and a regulatory clean-up after a Milan building permits scandal boost investor confidence - even as supply constraints loom.

Property research group Scenari Immobiliari forecasts transactions in Italy's real estate market will rise by 8.4% this year to 175.8 billion euros ($205 billion), with the residential market accounting for more than 80%.

That would be faster than 7% growth in Spain's property market, 6.6% in the UK, 4.1% in Germany and 3.2% in France, according to Scenari Immobiliari.

The Milan building scandal, which ‌became public in 2024 and centred on fast-tracking of permits to build high-rise developments, fuelled industry fears of an exodus of foreign investors. 

More than 100 building projects in the city, Italy's biggest real estate market, were frozen following the ​judicial process.

Scenari Immobiliari warned a year ago that prolonged gridlock risked costing Milan up to 38 billion euros in missed potential investment over a decade - either ‍directly in real estate or through knock-on effects in the local economy.

Yet a rare period of political stability in Italy ⁠under Prime Minister Giorgia Meloni, in power ⁠for the past three years, is helping attract investors.

Transactions in Italy's real estate market rose almost 7% in 2025, Europe's second hottest market behind Spain, according to Scenari Immobiliari.

Davide Dalmiglio, managing director and CEO at the Italian ‌unit of British real estate services company Savills, says the feared capital flight has not ​materialised.

The investigations "put investors on alert" prompting a level of pre-acquisition scrutiny "never seen in 25 years" with much deeper due diligence, he said.

Manfredi Catella, chief executive of property developer Coima, argues that by establishing stricter, although more expensive, rules, the judges have removed uncertainty on the interpretation ⁠of building regulations, which was the "market's main concern", he told Reuters.

Catella himself came ‍under investigation in a ​second wave of probes into the industry, which included charges of corruption among municipal officials, architects and developers, documents seen by Reuters showed.

Denying any wrongdoing, Catella said that two courts last summer rejected requests for him to be subject to house arrest, including Italy's Supreme Court, which Coima's foreign ‍investors viewed as a vindication of his position, he said.

GOOD METRICS

Beatrice Guedji, head of research and innovation at Swiss Life Asset Managers France, which oversees real estate investment in Italy, says the Milan affair is a short-term issue for the property market.

"Meloni's momentum and the country's growth prospects" were overriding themes supporting investment, she said.

Swiss Life Asset Managers France raised its allocation to Italy by 15% in 2025, with property investments since 2018 set to reach 500 million euros by early 2026.

Guedji pointed to "good key metrics" - including a tighter spread between Italian and German benchmark bonds, improved ratings outlooks and the Milan stock exchange outperforming many European peers - that indicate diminished country risk.

Italy, ​and Milan in ‍particular, has also attracted many millionaires in recent years due to a flat tax for very wealthy foreign individuals.

MILAN IN THE SPOTLIGHT AGAIN

Economic growth remains sluggish but the Winter Olympics, co-hosted by Milan in February, is bringing in money to the economy which is set to grow by 0.7% ​in 2026, after an estimated 0.5% expansion in 2025, the Bank of Italy forecasts.

The Olympics' impact on the property market may be short term.

"Short-term investors might have entered the market and already decided to exit quickly, surfing on the 2026 Games, especially in hospitality," Guedji said, noting her own firm's long-term focus.

Meanwhile, the fallout from the Milan property scandal lingers. Some investigations into alleged building violations have already gone to trial, while others are at an early stage. And more than 4,100 families are still waiting to move into flats at frozen projects that they already paid for.

LACK OF NEW SUPPLY

Supply is another issue for the market. Scenari Immobiliari forecasts investment in Italy's real estate will rise to 12 billion euros in 2026 from 11.5 billion last ​year, but warns medium-term supply constraints could limit growth.

In 2025, total residential transactions rose 7%, but newly built units accounted for only 10% of the total, down from an already low historical average near 15%.

"Mid-sized residential projects - the 20-30 unit buildings that replenish stock - have often stalled amid tougher dialogues with public administrations," said Francesca Zirnstein, Scenari Immobiliari's general director.

"The market is healthy and growing, but urban regeneration has slowed ‍due to investigations, resulting in fewer new developments in the coming years," she said.

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