E-commerce growth will boost the already booming Italian logistics sector even more, delegates heard at GARBE’s Investment Briefing – Italy: Real Estate Outlook 2023, which took place yesterday on Real Asset Media’s REALX.Global platform.
“This year has been exceptional, with 2.2 million sq m of warehouses being traded in Italy, which is over 10% of the total stock”, said Marco Grassidonio, managing director, GARBE Italy. “Speculative developments are being pre-let before completion after a bidding war, so cashflow is pretty secure. There is still a lot of growth ahead for the sector in 2023.”
The Covid pandemic gave a real boost to online sales, but Italy still lags behind other European countries so there is still a huge growth potential to be exploited.
“We need at least 1 million sq m more logistics facilities to fill that gap,” said Grassidonio. “The most active players in the market are retailers, couriers and e-commerce.”
Last-mile assets are the most sought-after, given Italy’s high population density and large number of cities. “There’s only one thing we cannot build and that’s land,”said Grassidonio.
“E-commerce penetration is well below EU levels so there’s room for improvement and the market is likely to grow further,” said Giacomo Morri, faculty deputy and associate professor of practice in corporate finance & real estate, SDA Bocconi School of Management in Milan.
On the positive side, Italy offers a sizeable market with strong purchasing power, many industrial companies, a stable banking system and strong and growing demand. The weaknesses are the north-south regional divide, a culture of risk aversion and a cumbersome bureaucracy.
However, the positives outweigh the negatives, said Grassidonio: “The sector is experiencing rental growth above inflation, higher than expected, and this compensates for the factors like the lengthy and complex permits process or high construction costs.”
Foreign investors have increased their dominance of the market and now account for 75% of transactions in Italian real estate, compared to 70% last year.
Most investments are done in the North of Italy, which is a strong location for logistics as it is so well connected to the rest of Europe. “Cross-border investors tend to be very careful about investing in the centre and south of the country,” said Grassidonio, but these regions offer great opportunities as product availability is very low.
“Investment volumes have skyrocketed in the last few years but looking ahead logistics is still an interesting sector to invest in because of the continuing lack of supply,” said Morri. “There is still a real lack of Grade A modern assets.”
In the last five years investments have grown by 31%, but the current crisis due to economic and geopolitical uncertainty is leading to a pause in the market.
“The main reason activity is slowing down is the gap between sellers’ expectations, which are stuck at six months ago, and buyers’ expectations that factor in future risks,” said Grassidonio. “But we expect there to be a new window of opportunity in Q3 2023. Capital preservation is guaranteed because rents are growing faster than inflation, so despite yields compressing there is still a lot of upside in Italian logistics.”
More investors are expected to target the Italian market after a stronger than expected performance in 2022, experts agreed at GARBE’s Investment Briefing – Italy: Real Estate Outlook 2023, which took place this week on Real Asset Media’s REALX.Global platform.
“It has been a good year for Italy, with a strong rebound after the pandemic and 3.7% GDP growth,” said Giacomo Morri, faculty deputy and associate professor of practice in corporate finance and real estate, SDA Bocconi School of Management in Milan. “Investment volumes in the real estate sector are expected to be higher than the €12 billion peak recorded in 2019.”
Foreign investors account for 75% of deals across real estate. Most capital comes from Europe (61%) but Middle Eastern funds and US private equity companies also have a strong presence.
“Italy is attractive because returns tend to be higher than in the rest of Europe,” said Marco Grassidonio, Managing Director, GARBE Italy.
Offices continue to be the most attractive sector for both domestic and international investors. “In the last three years office rental levels have been stable, but there is such a shortage of Grade A, ESG-compliant assets that rents are now rising in Milan and Rome,” said Morri.
The search for quality is noticeable in the retail sector as well, as prime shopping centres and retail parks continue to be in demand.
“Retail in general has seen a reduction in investment volumes, but there is strong interest from luxury brands that want to have a presence in the main shopping streets in Milan, Rome, Florence, Venice and other tourist destinations,” he said. “Tourism is recovering strongly, which is a real positive for Italy.”
International tourists have returned with a vengeance after pandemic-related travel restrictions were lifted, and this is boosting the hospitality industry. Visitor numbers to Rome are expected to return to pre-Covid levels in 2023, with other cities following soon after.
“Transactions in the sector represent 16% of total investment volume in Italy, compared to an average of 5% in Europe, which shows the level of interest,” Morri said. “The market is very fragmented and made up of privately-owned and managed hotels, so brand penetration is one of the lowest in Europe.”
Big brands represent 21% of total keys, compared to 58% in the UK and 57% in France. “But the market is changing fast, and there are four new luxury hotels opening in Rome alone,” he said.
Morri’s advice to investors interested in the Italian market is to have a strong presence or a good partner on the ground. “Remember that Italy is divided in 20 regions, 107 provinces and nearly 8,000 municipalities, all with different rules in terms of zoning, permits and real estate development,” he said. “Local knowledge is absolutely essential in order to operate.”