The Italian real estate market has been undergoing a transformation in the last few years in order to open itself up to increasing levels of international investment. Traditionally, many international institutional investors were deterred from investing in Italian real estate due to perceptions of a lack of market transparency and liquidity, in addition to high levels of bureaucracy. All this is changing. This article will briefly highlight the key drivers of this change and the challenges and opportunities, which lie ahead.
Like its other southern European counterparts, Italy’s membership of the European Union has boosted its economy and driven its property markets. Over the past decade, Italy has pursued a tight fiscal policy in order to meet the requirements of economic and monetary union and has benefited from lower interest and inflation rates. The current government has also enacted numerous short-term reforms aimed at improving competitiveness and long-term growth.
The net result of economic reform has been to encourage the growth of cross-border property investment, with foreign investment rising to 75% of total investment volume in Italy’s property markets in 2003, according to agents Jones Lang LaSalle. This represents €2.9bn, and ranks Italy fourth in Europe, just behind the UK, Sweden and France. The German open-ended funds and Spezialfonds have been the most active players, accounting for 22% of the total investment volume in Italy, followed by the US (14%) and the UK (13%).
Recent sweeping changes to legislation governing closed-ended funds have begun to have a major impact on the restructuring of the fund management sector by paving the way for the creation of new, innovative vehicles. In particular, since 2004 new Real Estate Investment Funds (REIFs) are fully tax efficient, which means that they could be viable and attractive instruments for foreign investors seeking to enter the market. New domestic funds are also being created with innovative financing methods such as the securitisation of the income streams of existing assets via the use of a special purpose vehicle (SPV). This trend is likely to continue. Italy’s property markets have suffered less than their European counterparts in the current economic slowdown as supply and demand fundamentals remain in balance across all sectors. The office sector has suffered the most, due to the decline in occupier demand, witnessing declining rents and rising vacancy rates. Nevertheless, improving economic prospects combined with stronger levels of take-up and a shortage of quality supply in prime markets mean that rental growth should return by 2006.
Performance in the retail sector has been stronger, due to higher levels of demand combined with a shortage of modern supply. In addition to modern shopping centres, new formats such as factory outlet centres and retail parks are highly sought after by investors, resulting in strong yield compression. Due to fierce competition among investors for the already well-developed north, prospects are greater in the south where yields are higher and the availability of this type of product is much lower.
Industrials have continued to perform steadily over the past year, better than the European average. The market suffers from a lack of supply of modern logistics product, but this should be alleviated slightly over the medium term by the increasing trend of logistics operators to outsource their assets, releasing them onto the market. There are limited opportunities for some investors, who could be attracted by the sector’s defensive nature and higher yield prospects than in the other sectors.
Greater opportunities are emerging for foreign investors as the Italian property investment market matures and opens itself up to the creation of new indirect vehicles. Market inefficiencies continue to exist, but these are being alleviated with greater liquidity and higher levels of foreign investment. We believe that Italy’s property market will be better positioned to ride the recovery than many of its European counterparts. As ever, though, market timing is crucial.
Joanna Holland is a southern European property analyst at AXA Real Estate Investment Managers, London.