/pulse/ Italy Capital Markets Q1 2015
The macroeconomic context The year 2015 begun following the global abundance of liquidity and a general improvement in debt conditions observed throughout 2014. Specifically, a number of elements, such as a sustained reduction in oil prices, the extensive application of Quantitative Easing (QE) by the European Central Bank (ECB) and a further fall in government bond yields, have all strengthened growth especially in developed economies. Within this context some risks do remain, however. The strong appreciation of the US dollar was the most significant trend in the first quarter of 2015, favourably impacting on advanced economies, especially those of the Eurozone, but at the same time diverting funds away from developing countries (due also to US interest rate growth prospects). Additional risks also relate to the possible impact of slowing growth in China. However ongoing discussions with Greece on the possibility of leaving the Euro (Grexit) limit the prospects for improvement in the Eurozone. The Grexit hypothesis is still open, highlighting how the underlying problems have changed little since 2011-2012. In the absence of relevant institutional and structural reforms, the only solution continues to be austerity, whose limits will soon already become apparent, in Greece. Despite this the forecasts for the Eurozone and UK economies have improved since the beginning of the year, whilst those for the US economy have been revised downwards, due to the economic slowdown recorded in Q1 2015 and to what will probably be a negative impact on exports brought about by the strength of the dollar. In particular the introduction of QE by the ECB is already considered by some economic observers to have been a success, although it will only be possible to assess its actual impact in a few months time. The early signs are good: the Euro has depreciated, government bond yields have decreased in this first stage and generally speaking all of the confidence indices in Eurozone countries are strengthening. Italy, Key macroeconomic indicators 2014 2015 Forecast 2016 Forecast GDP growth rate 1-0,3% 0,6% 1,2% Unemployment rate 1 12,6% 12,7% 12,2% Inflation rate 1 0,2% 0,1% 0,9% Household consumption 1 0,1% 0,6% 0,9% Industrial production 1-0,4% 0,8% 2,3% 10 yrs BTP yield 1 2,5% 1,5% 1,7% 1 Consensus Forecast, May 2015 More specifically, Italy s macroeconomic context continues to confirm the positive signals already being recorded at the end of 2014. GDP growth of 0.6% is expected in 2015, reaching 1.2% in 2016. The inflation rate is still a long way from the ECB objective of a level which is lower than but close to 2%. In the short term the inflation rate will remain stable at 0.1%, due to a sustained decline in oil prices, and should approach the 1% threshold in 2016. The weak Euro helps to support competitiveness in the exports sector, driving a growth in export flows towards non-european countries of 6% on the same period of the previous year. Industrial production shows a positive trend, as did the PMI index for the manufacturing sector (Purchasing Managers Index) which in April reached the highest level recorded over the past year (53.8). COPYRIGHT JONES LANG LASALLE IP, INC. 2015. All Rights Reserved 2
Household consumption continued to show signs of growth (0.6% in 2015) after the sharp decline in 2013, albeit at levels which bear witness to the trend for households to try rebuilding the savings eroded during the economic crisis. The recovery in consumer spending has slowed, partly due to the uncertainties which still exist within the labour market. The recently approved Jobs Act labour market reform is likely to begin having a positive effect on employment opportunities only in the medium term and is also expected to contribute to increasing the inflow of foreign investment into the Italian market. The real estate investment market Continuing on from the outstanding year-end closure in 2014, markets showed high performance levels in Q1 2015 as well, confirming that the real estate sector has now definitively begun a process of strong growth. Given the abundance of equity and debt availability with low interest rates now established, real estate investment volumes are expected to continue growing for the remainder of 2015. Within this context, corporates are ever more geared towards occupying new spaces, improvements in consumer confidence indices have revitalised the retail sector, and the logistics sector is increasingly benefiting from the strong expansion of e-commerce. The volumes invested globally increased by 9% on the same quarter in 2014. In particular, office sector yields for core markets already stand at what are historically their lowest levels, with further reductions expected in the first half of 2015. Much of the growth has been generated by activity taking place in the United States, where the investment market recorded a 24% increase in volume compared to Q1 2014, one of the strongest performances globally. Within the EMEA context, Great Britain s performance has been good and there is evidence of recovery for Spain and Italy. In Q1 2015 recorded investment volumes in EMEA stood at around 50 billion, a value in line with the same period in 2014. Although improvements in Eurozone economic fundamentals are forecast, it is very likely that geopolitical developments (Grexit, the crisis in Ukraine) will play a key role in guiding investor behaviour and consequently also the level of investment for 2015. As far as regards Italy, the investment volume recorded in Q1 2015 reached 2 billion, compared with 800 million in Q1 2014. This figure is one of the highest values ever recorded at the start of a year, confirming both the excellent closure for 2014 and the recovery of the real estate cycle which begun after the negative peak in 2012. In Q1 2015 a total of 28 transactions were closed, including the particularly significant acquisition by QIA (Qatar Investment Authority) of the additional 60% of the Porta Nuova project, which was recorded as a mixed use transaction (part offices and part retail). In the last 12 months there was a prevalence of transactions whose value exceeded 50 m. COPYRIGHT JONES LANG LASALLE IP, INC. 2015. All Rights Reserved 3
Italy, Total investment volume by sector, bn, 2005 Q1 2015 8,0 7,0 6,0 5,0 4,0 3,0 2,0 1,0 0,0 4,9 7,4 7,2 4,0 3,6 4,0 3,9 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Q1 2015 Mixed use/ Other/Mixed mixed Hotel Industrial Retail Office 10 yrs avg (incl. Peak) Italy, % of total investment volumes by transaction size, Q1 2005-Q1 2015 Out of total investment volumes ( m) 1,8 5,1 5,4 2,0 In terms of asset type, the significance of portfolio deals continues to grow, accounting for 26% of total transactions over the past 12 months and amounting to over half of the total volume (ca. 57 %). A cross-border portfolio deal was also recorded in the office sector, specifically the sale of EY's headquarters in Via della Chiusa in Milan city centre. Italy, % of the total number of investment transactions by deal type, Q1 2011-Q1 2015 Out of total N of investments deals 100% 80% 60% 26% 100% 40% 74 % 80% 60% 40% 20% 0% 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 20% 0% 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 Single asset deal Porfolio deals Analysing the type of investors which bought at the beginning of the year confirms the prevalence of pooled funds (55% of the total transacted volume), as for 2014 as a whole. Italy, % of total investment volumes by investor type, 2014 and Q1 2015 Q1 2015 2014 <25 Between 25 and 50 Between 50 and 100 >100 0% 20% 40% 60% 80% 100% Pooled funds Institution Propco's Corporate Private developer More specifically, the Office sector contributed approximately 720 million to the total investment volume (about four times Q1 2014). In Q1 2015 10 of the 15 Office sector transactions recorded related to the Milan market, for a total of around 575 million, confirming the strong level of interest in this market from international investors, who are now ready to evaluate value add products in core locations. The transactions recorded at the beginning of 2015 were predominantly single asset deals, although the contribution made by one portfolio transaction involving two buildings in Milan s semi-centre and periphery is worthy of note. The growing appeal of the Milanese market combined with a continuously limited availability of prime product resulted in a yield compression of 10 basis points on Q4 2014, reaching the current level of 4.70%. COPYRIGHT JONES LANG LASALLE IP, INC. 2015. All Rights Reserved 4
The amount of investment in Rome s office sector reached 62 million, mostly relating to Core product in the city s historic centre. In Rome too prime net yields showed a fall of 10 basis points to 5.20%, confirming a high level of interest in the Rome market from international investors combined with a limited availability of product in prime locations. The outlook for the office sector in both Milan and Rome is one of a further compression of prime yields in Q2 2015. During the beginning of the new year the retail sector recorded 6 transactions for around 170 million, 36% less than in the same period in 2014, contributing approx. 9% to total quarterly volume. The retail transactions closed were mainly core and 80% of capital was of international origin, with a prevalence of global capital from various countries. Two important transactions in the High Street sector were worthy of note. For a total of around 90 million, they were concentrated in Via Torino, one of Milan s most important retail destinations. The investors were Grosvenor Fund Management and M&G Investments. It is worth noting that, despite an abundance of global liquidity, the lack of large product available for sale in Q1 2015 resulted in small-sized transactions. If this situation were to persist, investor interest could shift across to the retail sector and focus on smaller, good, secondary product. In general, the most apparent signal for this sector arises from a much longed-for resumption of development activity. Real estate developers, supported by banks - which at last seem to have started providing credit again - and by investors who are now ready to bet on new schemes, are now realising innovative projects. These attract the interest of that capital which is finding that existing product meets neither their own requirements nor the ever more sophisticated requirements of end-users. Recent positive dynamics (household consumption, retail sales and slight prime rental growth) lead to a 10 bp downward adjustment of the prime net yield in Q1 2015 for all retail segments, bringing values to 5.90% for Shopping Centres, 7.15% for Retail Parks, 4.70% for Milan High Street and 4.80% for Rome High Street. Further reductions are expected in Q2 2015 also for secondary Shopping Centres. After an exceptional performance in 2014, the logistics market begun 2015 with an investment volume of 130 million. This was lower than that for the same period in 2014, when it reached around 180 m (consisting however almost entirely of one large portfolio transaction). Even the logistics sector was affected by high competition for existing product, which resulted in a tightening of prime net yields in Q1 2015 for all of the major locations: Milan, Rome, Bologna (about 25 basis points) and the Veneto region (approx. 15 basis points). Further reductions are expected in Q2 2015 in all macroareas. The lack of quality product is leading logistics investors to expand the focus of their interest, showing flexibility on product type but not on location. Investors are therefore also seeking value add product in prime locations. The favourite locations continue to be the Milan, Rome and Bologna macro-areas. COPYRIGHT JONES LANG LASALLE IP, INC. 2015. All Rights Reserved 5
Italy, Public information related to main investment deals, Q1 2015 Indirizzo/Nome Proprietà Settore Acquirente Prezzo m Viale Monte Rosa, 91 Viale Sarca, 222 - Uffici Partners Group 233 Piazza Affari, 2 - Piazza della Repubblica, 14 - Via Borromei, 5 - Uffici Cerberus Capital Management L.P. Uffici Fabrica Immobiliare Sgr 38 Uffici Blackstone 30 Via Cavour, 6 - Roma Uffici Castello Sgr 38,7 Via Torino/Via della Palla/Via Lupetta - Via Torino, 22/Piazza Santa Maria Beltrade - Interporto di Bologna - Bologna Retal High Street Retail High Street 44 M&G Investment Real Estate 75 Grosvenor Fund Management Logistica Prologis 62,8 15 Italy, Prime net yields, Q1 2010 Q1 2015 8,00 7,00 6,00 5,00 4,00 3,00 2,00 1,00 0,00 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 Euribor 3m Office Milan Shopping Centre Milan Warehousing Milan Office Rome Thus, all of the reported indicators and signals confirm how the Italian real estate market continues to attract both national and international investor confidence, even early in 2015. Faced with an ongoing lack of product available for purchase, investor attention has begun to be drawn back towards the development of quality projects. It can also be reasonably expected that the current situation, which was characterised by a chronic lack of product in 2014, will be unblocked over the coming quarters and that development will resume with confidence, albeit on a speculative basis. COPYRIGHT JONES LANG LASALLE IP, INC. 2015. All Rights Reserved 6
Jones Lang LaSalle Via Agnello, 8 +39 02 8586861 Cristiana Zanzottera EMEA Research - Italy +39 02 85868665 Cristiana.Zanzottera@eu.jll.com www.joneslanglasalle.com COPYRIGHT JONES LANG LASALLE IP, INC. 2014. All rights reserved. No part of this publication may be reproduced or tran in any form or by any means without prior written consent of Jones Lang LaSalle. It is based on material that we believe to be reliabl Whilst every effort has been made to ensure its accuracy, we cannot offer any warranty that it contains no factual errors. We would l told of any such errors in order to correct them.