• 22.11.2011

As will be 2012 for the Real Estate

We ask Nicola Franceschini, an analyst at BNP Paribas Reim.
 
A: The Italian macroeconomic situation is characterized by a slow recovery after the recession of 2008 and 2009.

In terms of gross domestic product levels of early 2008 are, in fact, still a long way since, after two years of sharp reduction in GDP (in 2008 was reduced by 1, 3% and 5.2% in 2009), Growth was then only 1, 3% in 2010 and is expected to be around 0.6% in 2011.

Growth prospects for the next two years should remain at this level.

These low growth prospects of the Italian economy, associated with the high level of indebtedness of the state, have raised concerns for a possible debt crisis in Italy, after Ireland, Portugal and, especially, the
Greece.

In fact, if the primary surplus (ie the simple difference between revenues and expenditures of the state) was only in 2009 and 2010, slightly negative (respectively 0.7% and 0.1% of GDP) The deficits of recent years has been almost entirely caused by expenses due to interest on bonds issued by the Italian government.

But this means that an increase in interest rates as what has occurred in recent weeks, will be offset by additional savings on public spending (or by revenue increases and hence the tax).

Only with a primary surplus is positive, in fact, the deficit will remain stable (and thus avoid a further increase of the ratio of government debt to GDP).

The measures that have been adopted, which will be adopted in the coming months with the change of government will inevitably have a negative impact on economic recovery in Italy and then on the real estate sector, at least in the short term.

The only interesting note for the industry is perhaps represented by the divestiture of public assets.

However, the time is perhaps not the best, taking into account the funds that will expire in the coming years and the fact that foreign operators are investing in our little country.
 
Q: The increase in spreads on Italian government bonds now allows an investor to take home an average yield of 6% over the medium term, much higher than those secured by a first property in the CBD of Milan.

Better then to concentrate their savings in fixed income rather than on the brick?

A: The dynamics of the rates of return on real estate is currently under pressure due to the bullish dynamic rates of return of government bonds.

The Italian government bond yields in 10 years was, in fact, steadily increased since the beginning of the year.

If the yields on government bonds persist at this level, then it is likely that real estate returns, including the first, return to grow.

In fact, the yields of these two asset classes are naturally correlated and their difference represents the inclination to risk an investor in a given time.

For example, between 2006 and 2008, ie the height of the real estate cycle, the differential had been steadily decreasing (and in parallel the risk appetite in the real estate was increased).

Later, however, this gap was to rise again after the outbreak of the crisis at the end of 2008.

Today, the spread between bond yields and the first estate of the Italian State in 10 years are negative (at least for the office returns), this situation is not sustainable in the long run.

If it is not conceivable that yields long-term government bond return on the levels of recent days, it is not possible, however, they remain at levels higher than a year ago.

Therefore, it is likely a catkin of returns in real estate in the coming months.
 
Q: In this context, what was the trend of investments in the real estate business in Italy since the beginning of the year?

A: The volume of investment recorded in Italy were very positive in the first nine months of the year, invested 3.3 billion euros, up 34% over the same period last year.

However, the estimated volume for the year-end should be only slightly higher than last year.

In fact, the Italian market has remained steady in the major trends that characterize it: the difficulty of finding funding, prevailing interest for the assets that have a lower risk and little investment of foreign operators.

In this regard, the flow of investments, net of divestitures made in recent years by foreign operators, who before the crisis were usually more than one billion euros annually, have essentially ceased from 2008 onwards.

It is assumed that this trend should change over the coming quarters.

In fact, the Italian market is less decipherable by a foreign operator, and therefore more risky, especially at this time.

Therefore, market participants will be mainly Italian ones, with little institutional investors will be particularly active, while those individuals would continue to close sales transactions for properties (both for office use is for commercial use) from the value between € 25 and 40 million euros.
 
Q: Italy has moved in line with the rest of the Old Continent has been trending or counter?
 
A: At the end of the third quarter, business investment in Western Europe grew by 13% over the same period of 2010, reaching 76.6 billion euros (of which 23.7 billion euros in the third quarter).

However, on an annual basis, the volume of investments has remained stable over the previous quarter.

In fact, the significant increase recorded in France, Germany and Italy was offset by the significant decrease in Spain, the Netherlands and, to a lesser extent, in the United Kingdom.

The offices were the product of choice followed by retail investors, whose growth has begun to slow.

In general, due to the economic situation, interest in the buildings core continues to be one of the main drivers of the market.

Unfortunately, due to the general climate of economic uncertainty that has characterized the third quarter of 2011, only in Germany is expected to record a double-digit volume growth on the whole of 2011, while in France and Italy will be on the growth of the lowest content.

However, from the fourth quarter of 2011, activity in the investment market should slow down, placing the 2012 levels of less than estimated for 2011.

di Maurizio Cannone