One in a Milan
Already the jewel in Italy’s fashion and design crown, Milan is a cut above in the country’s real estate sector, as experts reveal

It may be the second city of Italy, but Milan still boasts enviable architecture and a buzzing business environment, while, of course, remaining the undisputed capital of style. In 2017 so far, the city has also been a hub of institutional real estate activity.

In January, a new fund belonging to Barings Real Estate Advisors invested €44.35 million into a nine-storey office building with retail space, while Italian property investor and manager COIMA RES finalised an agreement to purchase two office buildings for €46 million, excluding taxes. Leased long-term to the BNL – BNP Paribas Group, the buildings are expected to generate €3.5 million in gross annual rent.

February saw AEW facilitate the sale and leaseback of a 127,000-square metre logistics facility in San Pietro Mosezzo, 60 kilometres west of Milan, on behalf of the Logistis fund. The site was acquired from, and then entirely leased back to, third-party logistics operator DSV, and brought Logistis’s assets under management in Italy to more than 330,000 square metres in total.

Tom Leahy, senior director of analytics for Europe, the Middle East and Africa at Real Capital Analytics (RCA), says: “There has certainly been an increase in interest in Italian real estate in the last 24 months, especially from overseas investors, which has pushed down yields significantly. Although a domestic REIT sector is emerging and that will change market dynamics.”

The market is rich for investment, and the industry is paying attention. Massimiliano Bernes, managing director and country head of Italy at AEW Europe, notes an uptick in interest in the Italian market in general, with an overall volume of €10 billion transacted on the Italian market in 2016. AEW transacted approximately €175 million in the Italian market. The majority of this is focused on Milan, Bernes says. In a nation of varying economic environments, the metropolitan area of Milan has a strong GDP pro capita and a solid industrial and services sector.

Bernes says: “The Milan economic environment stands out compared to Italy as a whole. It’s less volatile and there is an acceptable office vacancy rate, which keeps the demand steady and the rental values at a reasonable level.”

Equally, Bernes calls Milan “the real business capital of Italy”, housing most of the major banks, insurance companies and financial entities.

In terms of investment capital, according to data from RCA, significantly more is coming into Milan rather than Rome. In 2016, €3.56 billion was invested into Milan, almost twice the €1.96 billion invested in Rome.

This figure is also significant when compared to the €4.87 billion that was invested into the rest of Italy combined.

In Milan, the majority of investment, €2.52 billion, went into office assets, compared to €605.38 million that was invested into the retail space and €428.84 billion into ‘other’ property types.

This trend is echoed in Rome, where €900.92 million was invested into office assets, €614.56 million was invested into retail assets and €441.07 million went into other assets.

In the rest of Italy, however, other assets accounted for the majority of capital invested—€1.98 billion—followed closely by the retail sector, which saw investment of €1.92 billion. In contrast to the Milan and Rome markets, office assets trailed these sectors, accounting for €969.64 million.

It perhaps comes as no surprise that the Milan office sector is so significantly larger than that in Rome—or the rest of the country for that matter. According to Bernes, office rentals in Milan have reached record peaks of €500 per square metre.

However, he notes that the Roman office market is potentially more stable, and that it boasts a low vacancy rate of between 6 and 7 percent.

Bernes says: “This is mainly because a great majority of office spaces are tenanted by the state, that means that it’s more stable, by definition.”

“In Rome, there are a lot of corporate headquarters, but generally they are companies that have to be in contact with the state, and geographically close to public activities—they’re not the large financial institutions.”

There is far less discrepancy in the retail space, with capital invested into the sector in Milan and Rome hovering around the €600 million mark, while the combined rest of Italy saw more than €1.9 billion.

This suggests that, while office investment may be concentrated in the regional metropolises, retail interest extends to smaller cities—and a lot of this comes down to tourism.

According to Bernes, while Milan and Rome are among the top European cities for tourism, so too are the likes of Florence and Venice.

Bernes says: “While internal consumption may not always account for much, Italy has a strong expenditure from tourists, that’s why high street assets are highly valuable.”

Even in Milan and Rome, while there may be fewer transactions in the retail space, “this is simply because it represents quite a conservative product”.
“In this period of political and economical uncertainty, retail property represents a defensive strategy for investors. Those who own it try to keep it,” Bernes explains.

The overseas contingent is also having a significant effect on the real estate space as a whole, with European cross-border investment almost keeping pace with domestic, and both seeing significant increases over the last three years.

According to the RCA data, domestic investment into Italian real estate in 2014 totalled €1.64 billion, while investment from cross-border European, or continental, entities reached €1.58 billion.

In 2015, however, both domestic and continental investment saw considerable increases, reaching €3.65 billion and €3.03 billion, respectively.

While 2016 also saw an increase, the jumps were less drastic, with domestic investments totalling €3.97 billion and continental investments reaching €3.9 billion.

The story looks very different for cross-border investors from outside of Europe. Global, excluding Europe, investment into the Italian market totalled €2.95 billion in 2014, and jumped to €4.54 billion in 2015.

In 2016 global investment nose-dived again to a total of €2.51 billion.

Leahy says: “Although there is relatively strong demand, this is still a small market and the amount of investable, institutional-grade property is quite low compared with elsewhere. That is probably holding back volumes.”

Bernes, however, suggests that European cross-border interest has been maintained because the Italian market can still provide spread compared to other European cities, “so the premium for risk is more acceptable, and more interesting, in Italy”.

That said, he also notes that Italian institutional investors tend to shy away from blind pools, and that this reluctance creates more work for the portfolio managers.

“This means the managers mainly deal in large sale and leaseback transactions, and then report this to their investors. The investors then commit the equity only when the manager has already identified the product. This makes things a little bit more difficult.”

There is also, of course, the possibility that the current political situation in Europe has made the continent less attractive to non-European investors as a whole, and that the dip in wider international investment is not one that’s contained to Italy alone.

The UK’s vote to exit the EU in June 2016 rocked the markets, while major 2017 elections in Germany, the Netherlands and France have the potential to cause yet more upset.

Bernes maintains that, notwithstanding its referendum on the reform of parliamentary powers and the subsequent resignation of Prime Minister Matteo Renzi, the market in Italy will remain “more or less stable”.

He says: “In terms of the political Italian environment, we are quite used to instability and ungovernability, so the Italian referendum did not change much, and neither will an unanticipated election.

“I’m quite confident that things won’t get worse. We have only the chance to improve.”

“For some asset classes there will be an impact, but there will also always be recovery.”
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