The current Italian post-Covid situation doesn’t scare long term core investors who have been particularly active over the last 3 months.
Allianz bought a core office building in Rome for over €200 million - it’s second deal in two months - following the €140 million Sale and Lease Back in Via Armorari, Milan.
In addition, the Italian Pension Fund of the Doctor (ENPAM) through its asset manager DeA Capital SGR completed €86 million core acquisition of Mellerio Velasca buildings in CBD Milan from Kryalos SGR and a second core transaction in Rome will be closed in the coming days. Prime core assets are still attracting strong interest from investors which are focused on location, innovation, sustainability and tenant-use aspects. This approach is confirmed by Cushman & Wakefield’s Survey ‘Italian Real Estate Market - An Insight into Investors' Sentiment’, when we surveyed over 140 investors during May. Core office, logistics and residential opportunities have emerged as the most resilient asset classes, being the main focus for the majority of investors.
Italy has been judged as an extremely stable market without rapid pricing adjustments which help the medium/long-term investor view. In addition, most part of the investors are seeing a yield spread in logistic and residential sectors compared to the rest of Europe and the office sector is still being driven by quality, which is currently scarce. Key takeaways of the survey are as follows:
1. Investors are actively looking at the market trying to move into a more active investment phase and to place a significant volume of equity (82% respondents are still active on the market and capable of submitting LOIs).
2. Mismatch demand vs supply: there are approx. €20 billion of equity ready to be deployed in 2020 and 6 billion of assets to be sold.
3. Asset management activities focused on keeping the portfolio intact are investors main priority.
4. New investment strategy learns from the past to be more focused, with 74% of investors modifying their tactics by changing their projected equity allocation in terms of:
- Asset class:
- Increase: Residential 61%; Logistics 73%
- Stability: Office 55%
- Decline: Retail 80-90%; Hotels 43%
- Risk Profile:
- Core/Core plus: increase 50%
5. Re-pricing is expected across all sectors. If 70% of the investors are ready for a yield increase by year end, the scale varies among the different asset classes with office, residential and logistics more resilient, with prime yields expected to increase up to 25 bps.
6. Debt financing conditions for real estate are more difficult for 90% of investors.
7. Leasing market is back to normal on a different timescale according to the different asset classes but the rental trend is slowing down across all sectors, with the exception of logistics.
The economic numbers are starting to come in from official sources and the truth is clear: the effects of two months of lockdown will be so deep that the climb back will be more than challenging. In the latest June bulletin, the National Institute of Statistics (ISTAT) predicts that the Italian national economy will contract by >8% in 2020 with a partial recovery in 2021 with 4.6% growth. During the first quarter Italian GDP dropped by 5.3% and the preliminary data for April from the Confcommercio - Censis Report shows a decrease of 20 - 25% (UK official statistical data said -20.4%).
At the end of May, during the last annual meeting, Ignazio Visco, the Governor for the Bank of Italy, quoting from John Maynard Keynes’s book 'How to Pay for the War', said that the guarantee for a quick outcome is a plan that allows for endurance 'a plan conceived in a spirit of social justice, a plan which uses a time of general sacrifice, not as an excuse for postponing desirable reforms, but as an opportunity for moving further than we have moved hitherto towards reducing in equalities' in other words, the Governor highlighted the need for an important economic reform to gain the best results from European aid.
Reforms have also been suggested by the commission run by Vittorio Colao (former Vodafone CEO) which is supporting the Italian Cabinet in designing the future of the country, speeding up the country’s development and improving the economic, environmental and social sustainability. In this context the Italian real estate sector has been shaken by €1 billion transaction involving the fourth Italian banking group, UBI Banca, and Italy’s leading real estate investment, development and management company, COIMA SGR.
UBI Banca will concentrate its HQ in Milan agreeing a 15-year lease for ‘Gioia 22’, the building in Milan’s Porta Nuova district designed by the architectural firm Pelli Clarke Pelli Architects, simultaneously acquiring 100% of the shares of the Porta Nuova Gioia fund, which owns the Gioia 22 building, from a leading global institutional investor. At the same time UBI Banca has sold 7 properties in Milan to vehicles managed by COIMA on behalf of primary global and national institutional investors.
As the Government begins to ease lockdown restrictions, how is the social life of the high street starting?
Are consumers returning to the physical stores for their shopping?
Public transport will be hard hit by decreased commuting and with a fear of contagion, people will be more likely to walk to their local high street. This may suit some high streets and shopping areas more than others. Analytic data on the high street is difficult to obtain, so on site visits are the best way to test the field and we ‘tested’ a couple of different types of high street. In Milan, Corso Vittorio Emanuele - the most prime mass market high street in Italy - as you walk down the street, the feeling you get is that you are in August (when traditionally most Italians are on holiday).
The ‘normal’ frenzy of the street is missing, just like all the tourists as well as the 3 million commuters that travel in and out of the city every day. Outside a few mass markets stores a queue of people stand patiently in line waiting their turn to enter. Once inside you find a different world (compared to only 3 months ago): merchandise is maintained in an orderly manner; shop assistants greet you offering to help find what you are looking for and in general customers seem to be enjoying their shopping rather than wanting to leave the chaos as soon as possible.
It seems that the new trend in mass market is reengaging with the customer - a tailor made experience. Retailers are still trying to collect the first turnover figures and where a store, pre-Covid, averaged a turnover of €12,000 per day in the first weeks the numbers have been €2,000 per day (- 80%). Florence, Via Tornabuoni - the top luxury fashion prime high street in Tuscany - is quiet however, the Uffizi Museum has just reopened to the public with access to 450 visitors together (50% less compared to pre Covid). As you walk by you hear German, English, and Italian speakers queuing outside. Exiting an important high luxury fashion brand store, a customer comes out with 4 big shopping bags - the revenge spending effect? Notwithstanding this, especially the luxury brands are suffering the effect of restricted foreign travel and many have asked for temporary rent reductions which most landlords seem to have granted - the main objective is ‘keep the lights on’.
In this context, investors are still in the ‘wait & see’ stage, yet keen to invest even in high street retail, albeit with more selectivity. An expected drop in rental levels will probably impact on yields, although no transactions have been completed in Q2. Location and sustainability of rent will drive the investment and new KPI’s underlining leases will be the real hurdle for the near future. Even on the high street market, tenants and landlords will necessarily become partners rather than just counterparties. Data transparency will be fundamental for the success of the investment.
After 4 May (end of lockdown), 18 May (reopening date) and from the 3 June it will be possible to travel across regions. This date also represents the ‘kick off’ for summer weekends and for holidays (6 million Italians are expected to go on holiday in June). The tourism sector represents circa 13% of Italy's GDP and 6% of total employment. Foreign tourists account for circa 50% of the total tourism flow, spending over €44 billion in 2019.
Between March and July Italy lost 40 million foreign visitors (representing circa 18% of the total annual flow) and it is difficult to expect a full recovery by the year end. The current discussion is about the ‘corona - free’ corridors, which don’t currently include Italy, and borders closed between Italy and other countries will create further limitations on entering the country.
30% of hotels are expected to remain closed for the entire season; business hotels (4 and 5 stars in the major business cities) are suffering due to the travel restrictions (US travelers, representing 7.4% of total arrivals are absent) and are mostly closed. Despite this real estate investors confirmed their interest in a hotel asset which had a record year in 2019 with >€3.3 billion invested. The Italian hospitality market is still fragmented with a lot of privately-owned hotels where international hotel chains represent a small part of the market.
New development projects and hotel operator selections are still underway and interest from operators has not diminished.
In this context investors are looking for opportunities, taking into consideration that an important transformation and consolidation process was started before COVID-19, and we are expecting an acceleration post COVID-19 with interesting opportunities for hotel acquisition in the near future.
On 18 May almost all retail reopened, following several weeks where only essential retail stayed open (supermarkets, pharmacies, tobacco shops, DIY, electronics). The central government issued general guidelines, giving the Italian regions the ability to put in place further restrictions, meaning that the context may be different across the country.
The shopping experience has been radically affected, nevertheless the first week ended with a limited decrease in footfall. Most visitors went for focused shopping, so the slowdown in footfall was expected. At the moment, the trend varies depending on the type of site. Prime shopping centres (that normally work on larger catchment areas where customers expect a complete shopping experience), leisure centres (where cinemas and gyms are still closed), office districts located in city centres and high streets of tourist cities are the most affected.
On the other hand, neighbourhood shopping centres (with a strong focus on the primary catchment area), shopping centres with a strong component of grocery/supermarket, high streets of secondary cities and retail parks (thanks to several good performing stores: DIY, home & furniture goods, sporting goods) showed better resilience. After the first week, shopping centre footfall is already around 70-80% of 2019 levels and almost 90-95% of stores have already reopened, with some exceptions especially in F&B - one of the most affected industries due to the restrictive rules, fewer seats and additional mandatory cleaning activities.
On the financial side, to support the economic recovery, Italy has raised a record of over €22 billion with a bond sale (BTP Italia inflation linked). Institutional investors bought €8.3 billion of bonds, which mature in May 2025, showing how Central Bank stimulus and a potential EU recovery fund have increased investor confidence.
The Italian real estate market seems now to be reacting to the impact of COVID-19. The investment market was stirred by a €500 million deal closed by Vittoria Assicurazioni, an Italian insurance company, which bought a majority stake in a real estate fund owning ‘Il Quinto’ building in San Donato (Milan) from York Capital. Two additional buildings in Rome and Monza, as well as this iconic asset home to the ENI offices, were also transacted. At the same time, York capital bought 4 residential developments in Rome, Parma and Milan from Vittoria Assicurazioni, which completed the entire transaction. Additionally, at the beginning of the week, Corum AM acquired an €8 million office building in Rome from Tristan Capital Partners.
The office leasing sector is also showing signs of dynamism: in Milan 4,000 sq m in a centrally located asset owned by Bain Capital has been leased to a fashion brand at a rent aligned to pre-Covid level.
Italy is trying to return to some sort of normality: although many offices are now open, most of the working population continues to work from home. Following social distancing measures, from 18 May bars, restaurants as well as hotels and hairdressers were allowed to reopen. From Monday, 25 May, gyms and swimming pools will reopen and from 3 June, travel between regions as well as travel within the EU and Schengen Area will be allowed.
On the economic and financial side, the ‘Decreto Rilancio’ has been approved for a total of €55 billion for support. The main measures covered include the extension of the furlough period for an additional 9 weeks (€10 billion) and, for the real estate sector:
- tax credit for energy and large-scale building improvements
- credit covering 60% of the cost of the rent for shops, industrial warehouses, hotels and for non-residential lease contracts - if the turnover of the company has been reduced by at least 50% compared to the previous year.
On Monday 11 May about 4.5m people returned to work; families were able to go to parks, factories and construction sites are finally alive: a progressive reopening after 8 weeks of lockdown has started.
Between 11 and 18 May all the other shops will reopen except for bars and restaurants scheduled for 1 June. Normality will take much longer to achieve and the reality is that a lot of companies are still recommending that employees work remotely, due to the fact that only 20/30% of the workers are allowed in the office because of the social distancing rules.
The COVID-19 numbers (new infections and deaths) have been falling for more than a month but from Monday the attention is focused on the economic impact of the pandemic. The International Monetary Fund is expecting that Italy’s GDP will drop by circa 9% in 2020. UniCredit, the most important Italian bank forecasts a 15% fall. To partially compensate this fall, a new €55 bn financial law (so called ‘Decreto Rilancio’) is under discussion and will be approved this week. In addition, this week the access to the ESM has been approved to the limit of 2% of the GDP (Italy can borrow circa €35 bn to repay in 10 years at 0.1% of interest rate) to support the healthcare system.
The real estate market is still in a ‘wait and see’ position: office leasing negotiations that started before COVID-19 are proceeding slowly (circa 50% of the transactions are still alive compared to the beginning of the pandemic) as the office investment transactions (80% are ongoing). Retail, the most affected asset class, is still blocked and asset managers are working hard to fix issues with tenants, trying, at the same time, to understand what outcomes reopening will bring.
The Morandi Bridge, a strategic motorway connection in Genoa, collapsed in August 2018, killing 43 people. Despite skepticism regarding the duration of the reconstruction (Italy, unfortunately, is not famous for the efficiency of the bureaucracy machine). On Tuesday, 28 April, less than two years from the tragedy, the last section of the main structure of the new bridge was put in place, bringing the construction to the last phase of completion.
This achievement has been considered by the Prime Minister as a new light “giving hope to all of Italy”, a symbol of Italian strength and capacity. This symbol, this hope, is particularly important considering the 4 May is the reopening date for the country after more than two months of total lockdown.
In the meantime, Italian cities have started working to find solutions to manage key issues of Phase 2: first and foremost, transportation. Due to social distancing the use of public transportation will be limited to 25%/30% of full capacity, creating a lot of concern related to increase in traffic and pollution. In order to improve sustainable mobility, Milan is starting to increase bike paths; by September an additional 23 km will open and a further 12 km are expected by year end connecting peripherical areas with the city centre.
Two important facts happened in Milan this week which will explain, better than 100 words, the Italian real estate current market situation:
- A positive is that Hines has completed the acquisition, agreed before the COVID-19 pandemic, of 150,000 sq m land in the Ex Trotto area (the former horse racing track) which will be transformed into a major residential-led mixed-use scheme.
- On the negative side Unibail-Rodamco-Westfield has announced that the project for the construction of the largest and biggest shopping centre in Italy, planned to be built up in Segrate, Milan, and already named as 'Westfield Milan' has been officially suspended.
Italy’s re-start won’t be a ‘free for all’ but a progressive reopening: manufacturing and construction will restart on 4 May, all the shops and museums will open on the 18 May: bars, restaurants and hairdressers from 1 June.
Travel will be authorised within the same region but movement between different regions will only be allowed for serious reasons (work or health). During this week, when the Italian Government officially confirmed the date (4 May), Italy avoided a potential downgrade of its credit rating by S&P.
On Friday last week S&P confirmed a BBB Rating despite forecasting Italian debt’s level to 150% of the GDP level by the end of the year, due to the increase of bond sales needed to face the COVID-19 Emergency.
The ECB’s ‘bazooka’ for a massive assets purchase program stopped the additional public borrowing and put a stop to an increase in spread. In the meantime, another step ahead regarding the negotiation among the 27 EU Members was represented by the mandate to the European Commission to study a detailed proposal about the ‘recovery fund’ financed by EU bonds, which gave additional help to the country to keep the cost of debt under control. The Italian Government is also looking at additional financial aid for over €55 billion of which €13 billion to finance furlough (with 7.1 million beneficiaries) which will be approved by the end of this week.
Two topics made the front page of the Italian newspapers this week. The first is this week’s virtual meeting of EU leaders to discuss the form of the European support to face the crisis (ESM without conditions, 'Corona Bond' or other form of support). On this point the Italian politicians are not aligned and there is a lot of debate among different parties, opposition to the EU in Italy has never been higher. The second is related to Phase 2 which is expected to start progressively from 3 May; the guidelines are under discussions.
Bookshops, laundries, stationers, children’s clothes stores have already reopened in some regions and IT manufacturers workers are back at work. Different solutions are under discussion for the lockdown full exit plan, but some points are already clear: schools will open in September (Italian school year ends in June) and there won’t be other exceptions to the current lockdown measures before 3 May (as requested by some regions).
On the real estate side, market sentiment became more stable compared to the previous week but the ‘wait and see’ approach is common among investors, landlords, corporates and, in general, real estate players. Some investors, mainly opportunistic, started to ask for new opportunities with higher returns. On the other hand vendors are still reluctant to put new assets on the market before understanding how tenants’ requests will impact prices and yields.
In the last video message Italy's president, Sergio Mattarella, on the occasion of a ‘very different’ Easter said that "we also see the concrete possibility of overcoming this emergency [….] The sacrifices we have been making for more than a month are producing the desired results and we cannot stop right now".
The day before the Italian Prime Minister extended the country lockdown until the 3 May starting, at the same time, to scope out Phase 2 and hiring the former global Vodafone CEO Vittorio Colao to lead the governmental task force which is going to define when and how the activities will reopen.
Looking at the factsheet, first quarter market data had not reflected the full impact of COVID-19, with investment volumes in the range of €1.7 billion, aligned with the same period of 2018 and 2019 volumes, despite some deals having been slowed down. On the occupier market, take-up in Milan stood at 100,000 sq m, quite robust while Rome slowed down at 25,000 sq m.
In the first week of April, further deals have been stopped with investors becoming more cautious, mainly for value-add deals. Banks are found to be very selective, increasing the cost of financing (and lower LTV) and some of the lenders are on hold. In addition, no new assets have been proposed on the market with most selling processes on hold.
Italy is in its sixth week of lockdown and it seems it is approaching the turning point: the trend of infections is slowing down, but the lockdown has been extended to the 13 April.
The Government started talks about ‘Phase 2’ concerning the gradual re-opening of activities which is expected to begin in May, subject to the level of infections. In the meantime, a new financial law is under discussion for additional €30 billion of new incentives.
Corporate occupiers are starting to question about how they should change their office layout to allow employees to come back to the office.
It may still be too early to assess long-term space requirements: however, some assumptions can be made using a post-crisis scenario.
It is likely that employee’s safety, social distances, and smart working will be the key drivers for office space demand in the short term.
This may be reflected in an acceleration of tenants’ ‘Wellbeing’ policies and towards a greater use of technology and ‘activity based’ working.
It could also create more demand for space if space per capita increases. Landlords should take note of new corporate requirements and think about how spaces could change in order to retain tenants and manage space to meet new requirements.
Requirements for temporary logistics space is rising, as the surge in online retail has increased tenants’ needs for flexibility. This is more evident in the grocery sector which has experienced unprecedented demand for home delivery.
Investors are moving cautiously, paying attention to both the Italian Government and the ECB and their moves to support the economy. Some transactions are proceeding but with difficulties in purchaser due diligence activities.
Financing is starting to be an issue and investors that are less dependent on debt are taking advantage of lack of competition. They are approaching deals in a more opportunistic way or trying to create a robust pipeline.
Quarterly preliminary data shows investment volumes are in line with the same quarter of last year due to deals started at the end of 2019 and agreed before COVID-19. We are expecting a very low Q2 due to a total stop of new assets put on the market in the last 4 weeks.
One month of gradual individual lockdown and shut down of almost all activities (excluding the essential ones) including construction sites in Italy, has led real estate players to review their strategies.
Investors are reacting in different ways. Some have already started to put on hold their decision-making processes and some others are considering withdrawing or asking for discounts on advanced negotiations. There are investors that have confirmed their investment strategy, taking some advantage from potential lower competition.
In turn, banks have started to be more prudent in financing new deals with lower LTV and higher costs, stopping most of the value-add and more opportunistic deals. Overall activity slowed down in Q1, with core investors more resilient and some opportunistic buyers looking for rescue deals.
On the occupier side, retail, leisure and hospitality are most affected by the imposed restrictions and this is resulting in requests for rental renegotiations and/or temporary suspension. No sectors are excluded apart from logistics, at least so far. A small share of office tenants have asked for rent reviews or suspensions - mainly flexible workplace operators - but this share could increase as corporates assess their business exposure to the consequences of the outbreak.
Office take up could be potentially affected by major risks of slow-down in the medium term: pre-lease agreements could be reviewed in the light of completion delays.