Coima Forum: Italy is a buyer’s market as volumes drop 60%

Italy is a buyer’s market at the moment and it offers great opportunities for investors with capital and a long-term vision, delegates heard yesterday at Coima’s Real Estate Forum XII.

Gabriele Bonfiglioli, CIO, Coima

“Market timing is very favourable now, as prices are lower and there is less competition for assets,” said Gabriele Bonfiglioli, chief investment officer, Coima. “Investors have a wide choice, as there has been a significant drop in investment volumes in all sectors, except hospitality.”

The final figure for 2023 is expected to be €5-€6 billion, which represents a 60% decline on the record figure of €12 billion recorded in 2022.

Offices have been the worst hit with a drop of 85% in Q1-Q3 to €3.9 billion, followed by residential at €800 million (-63%) and logistics at €2.4 billion (-60%). Retail (-35%) and hospitality (-27%) have performed better in an uncertain environment, clouded by high interest rates, inflation, tough financing conditions and the risk of recession.

International capital continues to dominate, accounting for 70% of transactions, and there is a lot of dry powder ready to be invested.

“European-focused real estate closed-end funds have €79 billion available to invest, but they are looking for 13-10% net levered IRR,” said Bonfiglioli. “Core capital only accounts for 15%, with the majority focused on opportunistic and value-add. The cost of debt has rocketed from 2.3% in September 2022 to 6.1% in September this year.”

Source: Coima

In the office sector, prices have gone down even in large cities with a liquid market like Milan or Rome, but with huge variations depending on the location and the quality of buildings.

“It is a two-speed market, as tenants are willing to pay a premium for new Grade A offices in well-connected locations,” said Bonfiglioli. “Sustainability, energy efficiency and the quality of buildings are the top drivers of office demand.”

Rents in ESG-compliant buildings in the city centre or in areas with good transport links continue to increase, and have reached €700-750/sq m in Milan and 530/sq m in Rome.

“We see more rental growth ahead, as market polarisation intensifies,” said Bonfiglioli. “We also see a structural trend of tenants relocating to attractive and well-connected neighbourhoods. They are willing to downsize in order to have better offices in better locations.”

The hospitality sector is seeing a lot of activity, as the key Italian cities have seen the highest rebound after the pandemic. Venice (+29%), Rome (25%) and Florence (+24%) hold the top three positions in ADR growth (2022 vs 2019) in Europe, while Milan (+17%) is in 8th place behind Paris, Edinburgh, London and Nice.

“Tourist expenditure as a while has increased by 17.5% to €14 billion this year, and tourist volumes are expected to be above pre-Covid levels for the first time in 2023,” said Bonfiglioli.

The hospitality market is still very fragmented. In Italy the hotel chain penetration rate is 5%, well below the European average of 18% and a fraction of Spain’s (34%), Portugal’s (21%) or France’s (21%).

“The sector offers unique pipeline opportunities as private equity and other short-term investors need to exit after opening of new hotels,” he said.