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Milan offices are better than Bund

05 November, Milano Finanza

Rather than thinking of Milan as Italy’s northernmost city, we should start thinking of it as Germany’s southernmost city. This is the trend of the real estate market according to the investments yields as reported by Cbre.

Cbre head of Forecasting and Analytics Neil Blake, in a recently published article, analysed Milan’s yield trend. The report is titled “Are Milan offices safer than Italian Government Bonds?” which analyses the yield of Italian 10-year BTPs, now steady above 3%. As Blake writes, it’s not the first time that 10-year BTPs reach or surpass the 10% yield. Such a spike comes from the doubts of investors in the capacity of the Italian Government to manage the public debt and the budget deficit/GDP ratio. Generally speaking, there is a direct relationship between the yield of the market of prime properties and that of state bonds.

The spread has always been considered less risky than any real estate investment. In the third quarter of 2018, the yields for prime offices in Milan were set at 3.4%, while the average returns for 10-year BTPs were at 2.84%. The spread between the two values is approximately 56 basis points which are nothing compared to the 259 points spread with the Eurozone. There are two reasons for a low spread value or even negative spread: either inflation is to the roof, or rental prices are expected to rise. But this is not the case of Milan, although rentals in the city are growing following the trend of the other European cities. What is the reason then? The most likely explanation is that investors trust more the Milan office market rather than Italy’s public debt.

As Blake concluded, all the times that new offices were built in Milan, the BTP trend reacted with minimal and slow variations. Paradoxically, if we replace the Italian state bonds with the German Bud, the connection seems more pronounced, as if the Milan office market is perceived as a German asset rather than Italian.

Source: Milano Finanza

Translator: Cristina Ambrosi

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