The first half of the year has been quite an eventful period for the world, with some countries ending up in domestic political turmoil, such as UK and Italy. Indeed, in July Italy experienced the collapse of Prime Minister Mario Draghi's national unity government leading the President Mattarella to dissolve the chambers and call new elections for September 25th. Combined with that, the war in Ukraine, the geopolitical turmoil, the energy crises, rising inflation and tightening policy from central banks have all resulted in warns of recession for the global economy. For real estate it means that the low-rate environment is a memory of the past and investors and banks are preparing to face a not-negative interest rate scenario for the upcoming months.
But it will be a story for the next part of the year, while first half ended posting positive outcomes, both for the economy and the property sectors.
Country’s economy grew in the first semester 2022: GDP slightly rose in the first quarter and accelerated in the second one, standing at +4.6% on yearly base, according to recent Bank of Italy data. The gradual recovery of tourism backed this result and is driving confidence in the hospitality property sector which recorded almost 1 Bn Euro of investments in the first half 2022, +68% compared to the same period last year and +5% on the past 6 years average (including the record half year 2019). Hotel operators’ as well as investors’, confirm Italy as one of their top targets.
Overall, real estate sectors continued its race in the first half 2022 with both occupier and investment markets posting positive results. Investment volumes stood at circa 6.1 €Bn, more than double same period last year and +17% compared to 2019. It’s the highest first half ever confirming the high interest in the market. Capital flows for real estate are still robust but the new “higher rate” environment will add more cautiousness in the second part of the year.
The office market posted strong absorption figures in both Milan and Rome, well above pre-pandemic levels. Specifically, Milan reflected an increase of 48% on the same period last year, while in Rome, figures were roughly 5% above last year volumes. Quality, for people and environment, combined with efficiency are the major driver for Corporates looking for space.
Consumers are gradually back to a new normality, co-living with the virus and adapting their behaviors to the new headwinds of the rising cost of living. Turnover sales improved in April and May while footfall continue to be below 2019 level.
The fast increase in the interest rate has offset the improvement of fundamentals and investors continued to be selective on retail with roughly 400 million invested in the first half 22: better than last year. Despite that, the current high-level yield for shopping centre sector present a relative premium versus other property sectors and bonds. With fund raising up for opportunistic and value add strategies it could create some opportunities in the next months.
On the other side of consumer behavior’s changes lies the transformation of the logistic space and distribution supply chain which is driving the strong growth of the property sector: a new record for investment volume in the first half at 1.8 €Bn, the highest ever. Demand for space follows with 1.5 Mn sqm absorbed, +21% on the same period last year.
The bet on the development of the bed industry continue to drive institutional investors in their positioning in the Living sector. It is catching great interest from both domestic and foreign investors. Volume invested stood at around 630 €Mn, almost equal to full volume recorded last year.
Overall, we are entering second half 2022 with robust fundamentals for the property sector and with still robust dry powder for the industry.
Interest rate hikes would pose some threats to the property market in the future making more difficult for investors to access to financing. Banks have already increased cost for debt (+20-50 bps margin compared to six months ago). Despite that, the growing path of the industry in Italy toward maturity will not end.
Milan is still one of the most sought-after cities for investors, posting a 75% increase in investments in the first half 22 compared to the same period last year at €1.8 Bn; Rome follows setting a first half at €1 Bn of investment, huge increase on the €143 Million last year. It is confirmed as the target of an increasingly, and selectively, number of global investors.
Investors, both core and opportunistic, are still active. They speed up the closing of their ongoing deals before taking a break to think about new strategies to be aligned with a higher rate environment and the new market’s needs.
Their approach will be more cautious, underwriting more conservative and business plans will be updated with contingent data. The second half of the year will be different from what we have been used to, but the market will continue to move on.