Q&A: What is stopping Italy becoming the next boom market of Europe?

Eri Mitsostergiou, director of European research, Savills Italian investment volumes have been increasing steadily since 2012 and last year’s total of almost €10bn is 3.7 times higher than five years ago. Italy has now become the “next stop” after Spain for investors who have been looking for better returns beyond the core markets. Despite its slow growth and political unpredictability, Italy has proved to be a stable and less volatile market partly because of a lower penetration of cross-border capital compared with other markets. Italy is a G8 economy with an affluent population and significant business activity in the northern regions, as well as high tourist numbers. This has attracted investors particularly in the office and retail segments of the property market and, more recently, in hotels and mixed-use schemes. As prime yields have quickly converged with the core market levels over the past few years, real estate investors have been looking at alternative sectors for better returns.” The lack of modern stock and shopping malls has offered development opportunities and higher returns to less risk-averse players. At the same time, the tight and opaque planning regime – and the high number of listed buildings – makes development less attractive to more risk-averse players, but offers opportunities for refurbishment as demand for modern space rises. As prime yields have quickly converged with the core market levels over the past few years (Milan’s prime office yield is at 3.5%, Milan and Rome’s prime high street yield at 2.75% in Q4 2017), investors have been looking at alternative sectors for better returns. We have observed the emergence of the high street as a preferred asset class, particularly in cities with high tourist flows, such as Venice and Florence, and even secondary cities such as Bologna and Turin. In addition, student housing is in very short supply, and some real estate funds are seeking to create government-subsidised residences to alleviate the problem. International operators are also exploring possibilities in the sector, with the Student Hotel opening its first residence in Florence, with others to follow in Bologna, Rome and at another site in Florence in the next two years. E-commerce has also generated a plethora of activity for the logistics market, achieving an investment volume of €1.1bn in 2017 – a 70% year-on-year increase. It’s important to note that the institutional residential market doesn’t dominate the sector in Italy like it does in Germany. Italians have historically put their capital into residential property and, as a result, 71.4% of dwellings are owned by individuals, limiting the opportunity to buy residential product at scale – an asset class which is of particular interest to global pension funds. Investor sentiment for Italy has been driven mainly by market fundamentals, rather than political risk. A concern for the Italian market is the amount of non-performing loans. However, the creation by the government of private rescue fund Atlante should speed up the deleveraging process of the banking sector, restore confidence in the system and create a market for NPLs for investors who are interested in this type of product. We believe that 2018 will be another positive year for Italian investment. We may experience some hesitation from investors ahead of the elections, but we anticipate that activity will pick up in the second quarter, in a similar way that we have seen transaction activity picking up after critical political events in the UK, France and Spain over the past two years. This should be supported by positive fundamentals, lower interest rates, and rising liquidity in the market as a result of banks’ expansive policies and funds taking advantage of improving market conditions. Activity will continue to be driven by European investors, which accounted for a 47% year-on-year rise in 2017, but also the rising Asian inflows into the market, which saw a 126% increase year-on-year in 2017.