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OUTLOOK

Italian Real Estate Strategic Outlook

Investors flocked back to Italy in 2015. While this momentum should continue into 2016, unless the economy can substantially outperform expectations we see a risk that rental growth will not be able to compensate investors for today’s lower income returns. We continue to favour retail and logisticover offices. We see shopping centres offering the highest returns over the next five years, followed by logistics. With online sales in Italy growing rapidly but well behind Europe, successful shopping centres and logistics formats in markets such as the United Kingdom and France should provide a useful investment guide.

Investment at record high

  • In the 12 months to end-2015, the volume of commercial property transactions more than doubled in Italy to €10 billion. 
  • According to RCA, overseas investors remained the most active purchaser, accounting for almost 75% of all commercial deals done. 
  • This rise in investment has clearly had an impact on pricing with prime yields falling by between 50 and 100 basis points.
Record investmentled to an exceptionally strong 2015

The Italian market recorded exceptionally high returns during 2015. Having lagged the pick - up in the rest of Europe, prime total returns on offices and logistics in Rome and Milan were close to 20%, and even higher on major high streets. These returns were driven by investors , who having shunned the market for a number of years, re-entered in droves last year. The end of recession, higher than average property yields and a number of encouraging economic reforms by the government came together to raise investor sentiment. In total, real estate transactions grew 66% last year to € 9.7 billion, the highest level on record. With this, prime yields are now at record lows, having eroded much of the premium over other European markets. While the spread over bonds is still high, and the momentum from last year may continue into 2016, we feel that the positive value impact from yield compression is nearly over.

No shortage of good quality office space

Future performance will be more reliant upon improvements in the occupier market. There have been some signs of this, with office vacancy moving lower in Milan, but in general the occupier recovery is in its infancy.
While recent GDP growth rates have surprised on the upside, the medium term projections remain below the European average. While we see room for GDP growth to outperform these expectations, particularly if the government’s reform agenda boosts productivity, in our central case, with no shortage of office availability – even for high quality space – Italian office rent growth is likely to be little more than the European average, and well below strong recovery markets such as Spain and Ireland.
( Source: Deutsche Asset Management )

 
 
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