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Major foreign investors seeing Italian real estate’s deals slowing down

by Paola Dezza and Evelina Marchesini

The past year’s transactions seemed to point to a revival of Italian real estate’s appeal, but major international investors are again slowing down on Italian deals.

“We’re not seeing strong growth prospects in Italy right now and we’re concerned by certain political and financial risks,” said Raimondo Amabile, managing director and head of Europe for Pgim Real Estate. “ Leaving such concerns aside though, there are a few interesting investment opportunities. For instance, considering the scarcity of new offers in office property and quality retail, we can expect increased returns from rents for the best assets. At any rate, we favor Milan over Rome, where there are opportunities to reposition office and retail stock in the existing portfolios. Nor should we forget the residential sector, since there is a growing propensity to live in town.”

Raimondo Amabile is set to be on a select panel, together with the other top decision makers interviewed here by Sole 24 Ore/ItalyEurope24, on the occasion of the real estate summit organized by the Dla Piper law firm, “Quo Vadis, Italy?”, to be held in Milan Tuesday, October 25.

What are foreign investors interested in? According to Schmidt, commercial property in the luxury shopping areas and prime offices are the markets that have not seen any setbacks for several years, consistently rising in value.

“Italian family offices are very active on this type of product, and are often ready to pay more,” said Olaf Schmidt, partner at Dla Piper and head of the Italy team.

According to Cbre data, the third quarter of 2016 saw a volume worth €1.75 billion, up by 16.6% over the same period in 2015. The domestic component of invested capital amounts to €810 million, considerably more than the previous year’s €400 million. Foreign investors’ €1 billion shows that the share from overseas has diminished. Over the first nine months, investment volumes increased by 5% against the first nine months of 2015, reaching €5.4 billion.

Schroders’ view of the Italian market, however, is not optimistic.

“We have two funds investing in commercial assets in Italy but we are strongly disinvesting and converting for our investors,” says Chris Ludlam, head of Schroders Real Estate Capital. “We are aware of our low exposure on the Italian market, but at this stage of the economic and RE cycle, we prefer more mature markets offering better risk-to-returns profiles. We prefer European cities that show good growth in GDP, population and employment and constant improvements in infrastructure, housing local universities that nurture talent; so we focus on cities like Berlin, Paris, Stockholm, Hamburg and Brussels.”

Likewise very cautious is a ‘giant’ of asset management and real estate, Axa.

“We are concentrating on the post-Brexit referendum, which is bringing to the surface a strong aversion to risk on investors’ part,” said Anne Kavanagh, global head of asset management and transactions of Axa Investment Managers Real Assets, “and an appreciation for two main traits in the markets they invest in: transparency and liquidity. With this in mind, we like Paris and German cities.”

Axa Im Re is Europe’s premier real estate investment platform, managing over €66 billion’s worth of assets. Anne Kavanagh continues: “We need to go back to acting in the longer-term view and with rigorous selection. Secondary assets and cities, like southern and central Europe, will probably see a reversal of investor confidence. Today, investors need to safeguard capital rather than get good returns.”

German Deka, on the other hand, is willing to invest in Italy. With due caution. The team purchased assets in Milan last spring, “but when you take on Italy you need to take into account a lot of compromises,” says a spokesperson.

According to Laurent Luccioni, Pimco executive vice president: “Italy offers interesting returns, also in view of the yields of government securities in Europe. The future referendum might, however, encourage caution and induce investors to postpone decisions. Investors are not fond of uncertainty and political instability.”