Investor insights: Italy’s real estate renaissance continues

Francesco Dori, HLB Italy, Partner at Studio Alfuor & Association

In 2017, Italy’s real estate market recorded an impressive 18% growth. The country’s property market is thriving, and this is great news for investors.

In fact, Italy is in pretty good economic shape generally. The country is seeing surprisingly high levels of consumer confidence after the results of recent elections, and (thanks to the ongoing strength of the Eurozone) the recovery of the Italian economy gained pace throughout the year. Findings from CBRE’s Europe 2018 Real Estate Market Outlook show that economic indicators continue to improve. We continue to see positive macroeconomic trends in the first quarter of 2018.

And these trends are great news for real estate investors. Foreign investors have traditionally dominated Italy’s investment sector, and today still make up 79% of the market.

So, where should you look?

While the Italian real estate market has traditionally been driven by the Office, Retail and Industrial/Logistics sectors, other subsectors - such as Hospitality, Student housing and Care homes - are also showing great prospects for future growth.

According to a report by Crushman & Wakefield, the office property sector remains the most active in the Italian real estate market. Transaction volumes increased 70% from 2015 to 2017, and it’s expected that the office sector will continue to drive investments throughout 2018.

Foreign investment represented 73% of 2017 investment volume. The levels of interest that both domestic and foreign investors show in Milan confirm that the city continues to evolve and can compete with other large European cities.

Of course, high value properties are most desired, though hardest to come by. Factors such as scarcity, rising prices and decreasing yields will lead investors to look for alternative opportunities - especially when there is the prospect of achieving higher returns. As a result, Italy has recorded an increase in investments in alternative secondary locations.

Elsewhere, the retail property market made up around 20% of overall investments in real estate. Again, foreign investors dominated the market (80% in 2017, 75% in 2016), with the bulk of investment originating from the UK, Germany, France and US. Among domestic investors SGRs and private investors predominate.

However, rates of high-value transactions are low. As a result, there’s a strong demand for core plus opportunities and off-market deals - especially for core high street property and single asset transactions, which represent some 53% of the market.

In 2017, the logistics sector registered its highest investment volume in ten years. Portfolio deals remained prominent in the market, representing 76% of total volume in 2017.

The limited availability of high value properties creates competition. This is reflected both in yields’ compression and in the increase of new ways of investing. Pure developers and institutional investors are increasingly involved in forward funding and forward purchase. We even expect to see JV’s in the near future.

The evolution of the logistics market and a dynamic occupier market (driven by the presence of primary and international companies) continue to attract the attention of foreign investors.

New foreign investors are increasingly showing interest in the Italian property market, and we foresee growth in this sector. Northern regions are in high demand, and worth keeping a close eye on.

What can investors expect in the years ahead?

2017 showed a 22% year-on-year growth in property investment, from both local investors (mainly insurance and pension funds), and foreign investors. We expect this trend to continue through 2018. We also expect to see growth in opportunistic and value-add investments, in response to investor search for greater returns.

Despite gradually increasing restrictions on monetary policy in Europe, we expect increasing interest in the Italian real estate industry.

Among the asset classes, 2017 has been a record year for property markets once considered as a niche. Hotels saw a 12% increase compared to 2016, and the industrial and logistics property market almost doubled year-on-year. We foresee this trend continuing, especially in industrial & logistics property sectors.

We also believe the weight of niche asset classes considered will continue to grow. Real estate for healthcare (including RSA, hospitals, clinics etc) accounted for approximately Euro 600m of investments; a substantial increase compared to 2016. We expect to see more growth in this area in the near future.

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