Italian property has long been seen as a no-go area for international investors. The intense secrecy that surrounds property holdings in Italy has made it almost impossible to gather credible market data, which fuels suspicions of corruption.
But following the clean-up of the early 1990s some institutional investors are dipping their toes into the water. Their hope is that the economic reforms which have brought Italy to the brink of EMU membership will take root and lead to a more open and active property market.
The two key markets from an international investor's point of view are retail and offices. The Dutch-based Schroders International Property Fund and Trema, the French investor, have led the way into retail property, buying a number of new shopping centres.
Schroders bought the Curmo centre in Bergamo in 1993 and last year it followed this with a second acquisition, buying the 50,000 sq m Carugate development in Milan from Euromercato for a price that reflects an initial yield of 9.75%. And Trema owns one of Italy's biggest shopping centres, the 80,000 sq m Le Gru in Turin. Such yields are attractive in an international context, with French centres yielding 7.5% to 8% and the yields on the best UK shopping centres nudging down towards 5.5%.
The complexity of Italian retail leases means that investors have largely shied away from high street shops, although Nomura's Perfect One fund has bought a number of shops on sale and leaseback terms from local retailers Coin and OVS.
In the office sector, Milan is the dominant market. According to Battista Sormani of Milan Centrale Servizi an oversupply of offices - with vacancies running at 20% - is stifling rental performance in the city. He puts prime office rents at L450,000 ($250)/sq m/year, unchanged since 1995 and down from L750,000 back in 1990. Rome offices show a slight discount at L400,000.
Prime office yields, by the same token, are static at about 6.5%. Growth in rental and capital values is needed if more trading is to occur," says Sormani. "But realistically it is likely to be at least a further one or two years before any noticeable improvement is apparent."
The Milan market is undergoing astructural change as more office occupiers desert the old business district in favour of Bicocca, the 350,000 sq m redevelopment of the old Pirelli tyre factory to the north of the city centre. The Bicocca market is dominated by owner occupiers, with Deutsche Bank buying 33,000 sq m of office space there in 1997. Other occupiers include Siemens, Digital, Reuters and Shell and in the longer term the new buildings at Bicocca represent the best possibilities as far as institutional investment is concerned.
1997 also saw the first moves towards an indirect market in Italian property. The government has authorised the launch of Fondi d'investimente or quoted property funds but it has refused to grant them the same sort of tax transparency that has made real estate investment trusts (REITs) such a success in the US. But in spite of this both Deutsche Bank and Imi Bank have announced their intention to launch funds.
To achieve critical mass, such a fund would need a portfolio of around L1,000bn. The biggest potential source of properties on such a scale is the government itself. The two state social security finds, INP and INAIL have 39% of their property assets in the commercial sector, amounting to 6.5 million sq m of offices, 10,000 shops and about 1,000 industrial properties. But while there is demand from managers and vendors, it remains to be seen whether or not there is investor demand for such products. Graham Parker"