Next Stop Italy Real Estate - The best investing choices in 2023

GRI members in the Italian market discuss the best asset classes and locations for new investors

February 8, 2023Real Estate
The exclusive club meeting ‘Next Stop Italy Real Estate - Ready to make a bet on future shifts?’ took place on February 2nd at the Shard in London, with GRI club members from Italy, the UK, the USA, France, and more. The aim of this meeting was to discuss the Italian market as a whole, particularly for new investors. 

Offices and hospitality were the headlines of the meeting, as well as ESG and the best locations for investment and the shortage of product in the market.

Offices and Logistics see success in 2022, with Milan at the centre

Italy’s real estate market is characterised by a lack of public investment and a large private sphere, with an attractive centre in Milan and growing markets in Rome and smaller cities like Genoa. Accordingly, Lombardia, Lazio, and Emilia Romagna have witnessed the largest number of real estate projects in recent years. 

2022 saw success for Offices and Logistics, Light Industrial and Data Centre investments, with hospitality and healthcare following close behind and retail seeing far less cash flow. The cost of construction has increased significantly in the past two years, which no doubt has impacted willingness to invest and the type of projects being chosen. Overall, real estate received 11.7 billion Euros in investment last year.

Attendees at the club meeting noted that Milan is the easiest and most popular market to deal in - with the easiest process for obtaining building permits - but that Rome, as a smaller market with mostly old stock, may be easier to handle and less competitive.

The members also noted one significant piece of advice for this market, which is to have local team members based in Italy in order to find the most success, particularly as the due diligence required for the deals and construction process can be complicated.

Italia GRI 2023

Offices defy US investors’ expectations

The Italian Offices market is notably different to that of the USA, where this asset class is under particular stress, with high cap rate compression and high uncertainty. Executives noted that the situation has returned to pre-pandemic levels in many cases, but that foreign investors, particularly from the USA, have doubts and are hesitant to invest based on their own experiences. 

However, the focus in the Italian Office market has simply shifted to high-quality product and large amounts of space. This is where product shortage comes into play; many buildings in key locations are old and resources need to be channelled into refurbishment, or they will see no interest. The other option is to find land and build following the requirements, but finding available land in Milan - the best location for offices - is incredibly challenging.

Some members asserted that not even at the primary level has this sector settled, and there are even more complications at the secondary level, but this creates opportunities for value-add. Additionally, many agreed that the perception that Italy is a riskier proposition than other European countries is not true, although there is little depth to the market outside of Milan.

ESG is a requirement, not an option

One of the requirements of Office assets from investors in 2023 is that they are ESG compliant, which requires significant investment, particularly in the case of older buildings.

Studies also show that sustainable buildings come with a premium; prices for these buildings are higher by up to 25%. In this club meeting, ESG was demonstrated to be something not for adding value, but essential for generating interest in assets, and not at all a simple ‘fashion’.

Hospitality is an attractive sector

Other than Offices, Hotels were recommended strongly as an attractive option for investment and development in Italy, after recovering strongly post-pandemic. The location options, as well as the currently available assets and operators, are seen very positively. However, it is seen as an under-invested asset class, with property and advisory services in Italy also being immature, having an impact on these investments.

The GRI members noted that it is a very fragmented market, which makes it different and possibly challenging for outside investors familiar with areas such as London. However, it presents opportunities for off-market situations, such as buying from families, and direct dialogue with sellers. 

The country’s luxury hotel market was also noted as much larger than in other places. The executives attributed this to the high number of American tourists in Italy and the amount of money spent on vacations by this demographic. This also leaves a gap in the market for 3 or 4-star hotels. Moreover, a strong point for this asset class is that Italians also have an interest in taking their own vacations in Italy.

Italy’s recovery fund and public investments

In the case of both Offices and Hospitality, the sector struggles more than it should due to a lack of infrastructure, e.g. trains in areas outside of large cities like Milan, like the coastal cities or smaller towns that are also popular for tourists. In the past, Italy has ranked low for transport infrastructure compared to other EU countries.

In the coming months, Italy’s recovery and resilience plan should help to solve some of these issues and present new opportunities for hotels in secondary markets such as Genoa, as well as offices outside of city centres. Attendees also noted that public administrations are moving outside city centres due to improving infrastructure, which is a good opportunity for secondary and tertiary markets.

Ultimately, the real estate market in Italy is a private one, with less investment from banks; therefore, the market will depend on the tastes of investors, who currently require ESG-compliant assets.

Italia GRI 2023 takes place on the 15-16 May. Get your ticket here to meet the heads of Italian real estate and create real deals.

Written by Sarah Garnett