In a new analysis of the Italian bond markets relationship with the local real estate market, UBS says investors will need to show tenacity in regaining trust in the Italian economy in the event that the forecast proves to be too pessimistic, and the economy starts to grow at a quicker rate.
Nicola Franceschini, Real Estate Research – Europe at UBS Asset Management, explains:
“In the real estate sector, a short period of lower bond rates would hardly support a further yield compression and broader capital value growth. Economic reforms usually take some time to show their impact and investors will likely need to observe some signs of it before adjusting their views.
“The recent past has proved that prime yields didn’t suffer as much from the rises in bond rates, most likely because they were temporary. However, in the last decade, bond rates and real estate investment volumes have been highly correlated (Chart 4). Liquidity may be impacted more than yields and therefore investors with “normal” investment horizons (5-10 years), which typically represent cross-border capital, are likely to focus on liquid assets. Due to the country’s financial instability and in order to avoid potential liquidity constraints at disposition time, investors are likely to focus on prime real estate in established markets. This will likely maintain the pressure on prime yields and potentially lead to this segment becoming overcrowded. Indeed, with abundant available capital, investor focus on a limited share of the market should be monitored carefully.
“Outside the prime segment, disposal plans have to be more flexible, which should also require a significant yield spread to prime at acquisition. The current weak economic environment will be the base case scenario in Italy, and the polarization between prime and non-prime segments will keep growing. Only with a significant and lengthy improvement in the economic forecast will the Italian real estate market be able to record capital value growth on a broader basis.”