In a new report, UBS analyses the peculiarities of the Italian real estate market and highlight how investors have responded.
Nicola Franceschini, Real Estate Research – Europe at UBS Asset Management, explains:
“In the recent era of low interest rates, the low level of government bond rates in the eurozone was the primary force to push down real estate yields. The dynamic here is straightforward: investors looking for asset classes with higher income returns generate an increase in demand for real estate investments, which ultimately leads to a decrease in real estate yields. As with most sectors, Italian prime yields reached record low levels during the current market cycle. The reverse, however, did not happen when Italian government bonds started to increase – in mid-2018 – pushing the spread between real estate yields and government bonds to very low levels.
“Over the last decade Italian prime yields have followed the same road travelled by the main European markets. After the complex economic recovery from the Global Financial Crisis (GFC), real estate yields – supported by the lowering of interest rates – started to move downward and break new record lows quarter on quarter. While there was a small delay in the Italian market (compared to more established European markets), the overall trend was in line with its peers. This included the differences between real estate sectors due to structural changes in the real estate environment. Indeed, in Italy the only real estate segment not having broken prime yield record lows was shopping centers, while logistics recorded the largest fall in prime yields (around 300 bps over six years). However, this is also due to the growing relevance of e-commerce, which is driving investor interest to logistics while detracting from retail.”
Much has happened in the last decade, with the GFC ending the era of aligned bonds rates within the eurozone, according to UBS. The recession that followed led to severe financial problems in Greece, Ireland, Portugal and Spain (whose bailout took place between 2010-2012), UBS’ Nicola Franceschini added.
“Italy’s economic recovery has been slow. A new record low for Italian bond rates was set – at 1.05% – in August 2016, before increasing to between 1.5-2.5% in May 2018, and then between 2.5-3.5% the following year. Meanwhile, prime real estate yields remained stable at 3% for high street retail and 3.4% for offices. This meant that the spread between real estate prime yields and bonds rates was very tight for around 12 months – below both the 10- and 20-year averages as well as largely below that of other European real estate markets.
“This was not the first time such a low spread had occurred; during the eurozone debt crisis of 2011 the spread was negative for six quarters. The return of expansionary policies from the ECB, however, coincided with the change in Italian government, leading to bond rates falling to a new record low at the end of August 2019. Accordingly, the spread between bonds and real estate increased to levels higher than the historical average.”