INTERVIEW CBRE GI bullish on Italy as recovery gains momentum

CBRE Global Investors is looking more positively at the Italian real estate market, Rodrigo Vazquez, head of CBRE Global Investors’s Strategy and Research team for Southern Europe told PropertyEU.

The market still offers relative value as well as rental growth potential at a time when most core European markets are some steps ahead in their recovery curve, he said.

'The situation differs when compared to where Spain was at the beginning of 2014 as yields have already move down significantly, rents have not rebased to the same degree during the crisis and the economic improvement is still incipient. Having said that, Italy’s economics prospects have improved recently and there is more confidence on its recovery after four quarters in a row of GDP growth, the high levels of consumer confidence and the structural reforms (prime minister ed.) Mr Renzi is willing to implement,' said Vázquez.

With yields at record lows across Europe, investors should focus on rental growth in 2016 and Italy is one of the markets where rents have yet to catch up, he noted. 'Last year, Italy had one of the best performing stock markets across Europe. This is an indication that investors are anticipating some type of economic recovery which should eventually translate to the occupier’s market,' he added.

In terms of prime assets, however, he is more positive on retail and logistics than on offices, where yields are already below historical lows (4% in Milan). 'With such low yields you would need to capture a substantial rental upside to achieve above-average returns. Unfortunately, the typical lease terms in Italy (6+6 years standard lease length and 75% CPI indexation) makes it difficult to pursue this kind of core strategies.'

On the other hand, Vazquez reckons that prime high street retail assets or shopping centres in cities like Milan and Rome offer good quality thanks to their very rich catchment areas and tourism flows. 'I also like Italian logistics, because income returns compare well with other European markets and rents remain cheap in absolute terms (just 5-10% above historical lows).'

Good secondary assets also offer significant value potential in Italy, he added. 'The spread between prime and secondary assets is significantly wider when compared to markets like Spain. This is because value-added investors have not been so active in the market over recent years. However, if the new REIT regime definitely takes off, I would expect demand for secondary assets to increase, driving further yield compression for this kind of assets.'

Italy is expected to see at least two new REIT listings in the first quarter of 2016. 'Secondary cities with good fundamentals such as Bologna, Venice or Turin could also benefit from a larger listed real estate sector,' Vazquez said.

CBRE Global Investors opened an office in Italy in 2003, and currently has 20 staff on the ground managing around €1.1 bn of assets on behalf of 11 different clients (country specific and pan-European funds as well as separate accounts). Retail accounts for 74% of the portfolio, followed by offices (21%) and other assets (5%).