Coima: new opportunities from the slowdown in Italian market

The Italian real estate market is experiencing a sharp slowdown and re-pricing, which can open up significant opportunities for investors who get the timing right, Coima said in a market update yesterday.

“Transactions and developments are on hold, and this has implications for pricing,” said Manfredi Catella, founder and CEO, Coima. “Financing costs, construction costs and cap rates are all increasing and we can see an accelerating dynamic in the market and potential distress. Current conditions can create interesting opportunities for investors.”

Currently there are €2.2 billion transactions on hold in Milan and €1.6 billion in Rome and a shortage of buyers, Catella said.

Transactions fell by 50% in Q4 last year compared to the same period in 2021 and little improvement is expected this year.

“We expect a strong decline of 40% in transactions in 2023 and a marked slowdown in activity”,” said Gabriele Bonfiglioli, managing director, Coima. “The office and residential sectors will be the least impacted, while retail and logistics will be the worst affected.”

Re-pricing for prime and sustainable core office assets has been extremely limited, as demand far outstrips supply.

The leasing market is also very strong, with a +30% take-up in Milan, which has a 2.6% vacancy rate, and a +6% in Rome, where demand is capped due to lack of available product, as reflected in the 1.3% vacancy rate.

Rents are high and are expected to increase further, Coima said. Prime rents in Milan’s CBD area are now €700/sq m but are expected to rise to €750/800 sq m, while Rome is above the €500/sq m mark.

“A key element of the market is that tenants are choosing to move to more central locations,” said Bonfiglioli. “Big companies prefer to take less space but in better quality buildings at prime rents.”

Rental growth is set to continue, as the development pipeline in Milan is slowing down significantly. Coima expects the gap between supply and demand to be 135,000 sq m in the next four years.

The residential market is also showing promise, with transactions growing in Milan and Rome and prices beginning to rise. Italy has been lagging behind other countries and prices would have to rise by 45% to reach the European average.

“The residential market offers potential upside in all its forms,” said Bonfiglioli. “Given the increasing preference for renting in cities, there are significant pportunities for PRS investment.”

The Italian market has traditionally been dominated by foreign investors and this continues to be the case: in 2022 only 28% of transactions were done by domestic players, with international capital accounting for 72%.

However, this is set to change, Bonfiglioli said: “This year we expect strong growth in domestic investors’ involvement in the market, especially new types of investors like pension funds that have zero allocations to real estate but are now beginning to invest in the sector.”