Italian commercial real estate investment going from strength to strength

Investment in Italy’s commercial real estate markets is going from strength to strength with the first half of 2016 seeing over €3.4 billion of sales, up 35% on the same period last year.

The latest investment analysis report from international real estate advsor Savills says that favourable market conditions are fuelling supply in the Italian market through fund liquidations or equity fund investors who are taking advantage of the point in the market’s cycle to dispose of some of the most liquid assets in their portfolios.

It says that it is significant that cross border investment into Italy accounted for more than half of the total investment volume in the first six months of 2016, and close to 65% of all deals. Savills has recorded that international funds are increasingly dominating the market, with 80% of foreign capital coming from Europe.
‘Our analysis suggests Italy is at an earlier stage in the cycle compared to Europe’s primary markets in France, Germany and the UK, therefore international investors are still identifying the potential for capital growth and better returns from core Italian product,’ said Eri Mitsosterigiou, director of research, Savills Europe..

‘We believe that investment demand for the remainder of the year will continue to be driven by European investors, however we also envisage domestic investors to up their buying activity,’ Mitsosterigiou added.

According to Savills, investment into the office sector in Italy this year accounted for circa 46% of all activity, over 40% ahead of the first half of 2015. The retail sector represented 26% of the total investment volume, also a yoy 40% hike.

The report points out that the high streets of Milan, Rome and Florence are dominating the retail investment market and the first six months of this year saw around €505 million invested, an increase of circa 80% compared to the previous year.

‘Italy is a country with above average household disposable income and strong tourist flows in some of its biggest cities. The resilient characteristics of high street retail, with stable or rising rents, low vacancy and high demand is attracting investors,’ said Marco Montosi, head of Investment, Savills Italy.

Savills also recorded that the first half of 2016 saw a notable increase in investment into alternative commercial real estate sectors including hospitality. Almost 22%, some €761 million, of the total volume can be attributed to investment into the alternatives sector, markedly within healthcare.

Also of note is that the vast majority of the transactions so far in 2016 were on a single asset basis, whilst portfolio transactions accounted for 21% of the total, down from 35% in the first half of 2015.
Looking at the next 12 months, Savills believes that the supply of commercial real estate is set to increase as funds will take advantage of the improving market conditions, particularly the ones that purchased in the low point of the cycle in 2011/2012.

‘Prime locations of major Italian cities are most likely to benefit from this trend, while top yields for the best office and retail assets in Milan and Rome could stabilise this year following a few quarters of steep yield compression,’ Montosi explained.

Savills states that despite a fragile banking sector, a growing number of investors are confident about the economic recovery in Italy. They are attracted by better returns, the devaluation of the euro, interest rates at historic lows and larger liquidity in circulation thanks to the banks' expansive policies.

It adds that the creation by the Government of the private rescue fund Atlante should speed up the deleveraging process of the banking sector, restore confidence in the system and create a market for non-performing loans for investors who are interested in this type of product.

‘Prime yields have hit record lows, if compared to the previous pricing peak in 2007. Nevertheless they compare favourably to the long term government bond yields, which are also at historic low levels, meaning commercial real estate in Italy is likely to remain an attractive investment for the foreseeable future, ’ Montosi added.