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UBS: Italian market is an outlier among European peers

Italy’s prime segment is a relatively small share (top 5%) of the market. When looking at the average performance of the entire market, the picture is different, according to new analysis by UBS.

Nicola Franceschini, Real Estate Research – Europe at UBS Asset Management, explains:

“Let’s take the office sector as an example. On the one side, prime capital value growth in Italy was very strong, driven by the downward trend of prime yields and – most recently – by rental growth (prime values have increased overall since the end of the last cycle in 2007 by 4.5% per annum). On the flip side, average office capital values are still to return to their pre-2007 values as they have since decreased by 1.2% per annum.

“In Europe, the capital growth recorded in the prime segment was common, even if with different growth levels. Instead, average values in the main European markets have at least recovered to 2007 levels. This may be a clearer reflection of Italian government bond trends and of Italy’s economic weaknesses in general. Indeed, the struggle to recover at a national level is relatively less relevant to prime property’s performance for several reasons. Some regions in Italy are performing better than others, most notably, the north of Italy and Milan, which have recovered better from the recession. In general though, it seems that the recent weak economic growth in Italy was enough to boost demand in the real estate sector on the upper slice of the market, with the remainder lagging behind. It is difficult to define a precise threshold between the part of the market performing well and the one that isn’t. However, it is crystal clear that the polarization in capital growth between the prime segment and the whole real estate market in Italy has been increasing faster than elsewhere.”

Franceschini says the new wave of expansionary policies adopted by the ECB is playing a crucial role in the decrease of interest rates across the eurozone, Italy included. She continues:

“Italy is far from solving its economic and public finance challenges; therefore, it remains vulnerable to bond rate volatility. While many countries in Europe took advantage of the period of economic growth and low interest rates to decrease their debt to GDP ratio, Italian public debt only decreased marginally. Furthermore, the future does not look bright as Italy’s GDP growth forecast is the weakest in Europe.

“If this turns out to be the case, expectations of weak growth and slowly decreasing government debt will prove to be correct in the near term. Such periods of instability may have a relatively low impact on prime real estate yields as the recent past has proved. It has to be noted that the periods of tight spread between bond rates and prime real estate yields have been relatively short in duration.”

james.wallace@realassetmedia.com