Commercial property investments in Italy reach €1.9b in third quarter 2018

Investment volumes in Italy’s commercial real estate market during third quarter 2018 were in line with the same period of 2017, totaling €1.9 billion ($2.2 billion), about 50 transactions, according to BNP Paribas Real Estate. The quarter was positive, up approximately 10 percent from second quarter 2018 and higher than the five- and 10-year averages for third quarters of the year — increasing by 38 percent and 70 percent, respectively.

The year-to-date result confirms there has been a slowdown since 2017: €5.1 billion ($5.9 billion) was invested in Italian property during the first nine months of 2018, a decrease of approximately 25 percent compared with the same period of 2017. Third-quarter investment volume helped to reduce this year's percentage gap with 2017, caused essentially by the less positive trend of the first six months of the year after the record close of 2017. The overall size of the Italian market, however, continues to remain above the five- and 10-year averages of the first nine months of the year, up 12 percent and 37 percent, respectively.

The positive trend in the retail sector continues, and in third quarter 2018 it was the main contributor to total volumes in Italy, with approximately €700 million ($803 million) invested, representing 36 percent of the quarter’s total volume. This brings year-to-date investment in Italian retail properties to approximately €2 billion ($2.3 billion), equal to about 37 percent of total investments in the first nine months of 2018 and is up 20 percent compared with the first nine months of 2017.

The Italian office sector continues to suffer from a shortage of products, which weighed on the third quarter result. The office sector saw approximately €530 million ($608 million) of investments, a 26 percent decline year-over-year, confirming the slowdown of this year. Thus far in 2018, approximately €1.7 billion ($1.95 billion) has been invested in office properties, a decrease of around 38 percent compared with the first three quarters of 2017.

Logistics continues to be a dynamic sector. Approximately €450 million ($516 million) has been invested year to date in several transactions, especially in Milan and Rome. Moreover, with a number of projects in the pipeline, the full-year total is expected to contribute to this solid result.

Investments in the hotel sector reached approximately €500 million ($573 million) in the first nine months of 2018, a slowdown of approximately 20 percent compared with 2017 but still higher than the five- and 10-year averages by approximately 10 percent and 35 percent, respectively.

Another €500 million ($573 million) has been invested so far in 2018 in products included in the alternative category (care homes, student housing, data centers, barracks, cinemas), confirming the growing interest in these assets since 2014.

As for net prime yields:

• In the third quarter, Milan recorded a further compression of 10 basis points for office yields, reaching 3.3 percent. Office yields in Rome were stable for the fourth quarter in a row, at 4.15 percent.
• Net prime yields in retail were generally stable from the second quarter in all subsegments: shopping centers at 4.9 percent, high street Milan at 3 percent and high street Rome at 3.3 percent.
• Prime net yields were also stable for logistics at 5.25 percent.

In the first nine months of the year, investment in Milan totaled approximately €2 billion ($2.3 billion), in line with 2017 and above the five- and 10-year average for the first three quarters of the year by approximately 15 percent and 54 percent, respectively.

The results for Rome since the beginning of the year in terms of volumes are 10 percent approximately lower compared with 2017 but higher than the five- and 10-year averages for the first nine months of the year by 16 percent and 19 percent, respectively. More specifically, third quarter 2018 investments reached approximately €300 million ($344 million) in the city, a value fully in line with the same quarter of 2017.

“Third quarter results have made it possible to reduce, but not eliminate, the gap in volume compared to last year which is occurring in the commercial investment market in our country,” said Cristiana Zanzottera, head of the BNP Paribas Real Estate Italy research department.

Zanzottera added, “Though the market remains highly dynamic, as evidenced by the large number of transactions in 2018, overall volumes were affected by the absence of large deals and significant portfolio transactions that characterized 2017. The Italian market continues to create value and therefore remains of great interest for investors, including international investors, who again in 2018 are generating the majority of volumes.”

Moving on to the analysis of the office leasing market in Milan, third quarter 2018 registered absorption of approximately 1.27 million square feet, the best third quarter ever for the city. In the first nine months of the year, there was take-up of more than 3.4 million square feet, a 25 percent increase compared with the same period of 2017.

In particular:

• In third quarter 2018, 269,000 square feet of transactions closed in the CBD Duomo, more than double the level of second quarter 2018 and more than triple the level of third quarter 2017.
• The occupier market trend of the CBD Porta Nuova in the third quarter improved considerably compared with the first and second quarters, which had absorbed approximately 108,000 square feet. Third quarter 2018, with approximately 248,000 square feet absorbed, represents one of the best quarters of the past five years for this sub-market.
• The increase in take-up in the Centre and Periphery submarkets compared with second quarter 2018 should be noted. Inferior results were recorded in the third quarter for the Semi center (which, however, in second quarter had been affected by the significant pre-lease of the third tower of CityLife) and for the Hinterland.

As far as rents are concerned, prime rents continued to grow in Milan for the CBD Duomo, reaching €580 per square meter per year ($62 per square foot per year) in third quarter 2018. Unlike the previous quarter, in which prime rents remained stable in all other submarkets, positive changes quarter-over-quarter were observed in third quarter even in some less central areas: up 7 percent in the Semi center and up 8 percent in the Periphery, reaching €320 per square meter per year ($34 per square foot per year) and €280 per square meter per year ($30 per square foot per year), respectively.

Unlike Milan, the office leasing market in Rome posted a 50 percent drop in third quarter 2018 compared with the level recorded in the previous quarter and third quarter 2017. In third quarter 2018, almost 325,000 square feet were absorbed in Rome for a year-to-date total of approximately 1.24 million square feet. Compared to the space absorbed in the second quarter, the lower dynamism of the city appeared in all submarkets, with the exception of Periphery and Out of GRA, which remained at the same absorption levels of the previous quarter. As for prime rents, like the previous quarter, the only increase was that of the Rome CBD, which in third quarter reached the level of €440 per square meter square per year ($47 per square foot per year). The other Roman submarkets were stable.