Prime retail rents expected to fall in Italy for the first time in three decades

In a research report written by property economist Amy Wood, the firm warned that prolonged weakness in domestic and foreign spending on prime high streets in Italy will add to pressure on rental affordability, triggering rental falls this year. Capital Economics expects rent to fall by around 3% year-on-year over the course of 2021.

However, a less significant increase in online penetration during the pandemic supports the view that rents will return to growth further ahead.

In 2020, prime high street rents in the Italian markets held broadly steady, in contrast to a fall at the euro-zone level of 9% year-on-year. The stability of rents was surprising given that retail sales were weaker than the euro-zone average, although prime retail rents in Italy have historically been sticky downwards.

There are already signs that retailers are under pressure. Agents report that the use of incentives increased sharply last year. And prime retail rents in real terms are above trend, particularly in Milan. In the weak economic environment, this can provide an indication that the ability of tenants to pay rents is more limited. And since spending on prime high streets is expected to only improve slowly, even as the vaccine rollout gets underway, rental affordability is expected to become more of a concern.

However, Capital Economics remains optimistic on the prospects for Italian retail further ahead. History suggests that foreign tourism will not be permanently damaged by the pandemic. Further, once the vaccine rollout allows the lifting of virus restrictions, office workers will return to city centres. Even though some of the pandemic-driven increase in remote working is likely to become permanent, this will still give a significant boost to footfall in Milan, which has one of the largest commuter populations in Europe.

Admittedly, there is a risk that a greater shift online in the luxury retail sector results in a further consolidation of store portfolios. But there are early indications that Italy might not be as susceptible to a post-virus acceleration in online spending, which should support domestic spending in stores. Online penetration increased by much less last year than in Portugal and Spain, where online shares have also tended to be lower by euro-zone standards. As such, after an expected fall this year, Capital Economics expects prime retail rental growth to return to the Italian market over 2022-2025 to the tune of 1.7% per annum.