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Italian real estate is still appealing for investors
07 December, Italia Oggi
The Italian real estate market is currently very active thanks to international investors: over 70% of the real estate investments in Italy in 2017 originated from foreign capitals. This percentage is meant to increase year after year. At the end of 2018, the quota might reach 75%, as we can see from the high number of transactions already completed so far, as well as those about to be completed. The market has been impacted by the current political uncertainties, but it also opens to new opportunities and challenges. For this reason, law firms are more and more specialising in real estate.
“Law firms are adapting their services to the changes of the society and of the market. It will be necessary to think out of the boxes, to redesign new structures, to be flexible and dynamic in order to deal with the market needs”, explains Milena Linguanti, counsel for Allen & Overy. “We’re currently assisting at a radical change in the retail sector, where the traditional model has been challenged by the changes in the consumption habits, as consumers are seeking experiences and not just places where to shop. We can start already noticing this trend in the malls, which now offer entertainment besides shopping. For this reason, we need to create flexible models that can be easily adjusted to the changes. Investors have adapted to this ever-changing scenario: high-streets are still very important in the strategies of big brands, for whom physical stores are the representation of the brand. It’s essential to offer consumers a cross-channel shopping experience. For this purpose, logistics plays an essential part. We hope that thriving activity in the sector will continue, thanks to the consistent demand for innovative and modern logistic hubs which satisfy the needs of retailers for a more efficient supply chain”.
Italy is still an attractive country, “if we consider value-added and opportunistic investments”, stresses Rita Marchetti from Baker McKenzie. “If we consider core products, we must remark that investors that are already present in Italy are still very interested in the country, especially Milan. On the other hand, new investors are more cautious and are currently waiting before entering the market. In retail, investors are waiting to see what the Government will decide about the possible closure of shopping centres during Sundays”. Moreover, there are some issues related to regulations and taxation: “just think about how a retail investor looks at the threat of closing shops on Sundays”, continues Marchetti. “Besides, the appeal of real estate investments is not homogeneous throughout the country since Milan absorbs a large part of the investments, followed by Rome, although there is a shortage of new and quality assets on offer in the capital. A more stable legislative and tax situation would be beneficial not only for international investors but also for Italian ones. We might also plan more specific operations such as the extension of the flat tax to commercial rentals or the harmonisation of the regional legislation concerning assisted living”.
“Real estate suffered from the financial crisis and the consequences on real estate assets and the significant reduction of working capital. The market values had plummeted and then set around the same values as in 2006-2007”, commented Alessandro Manfredini, counsel from the law firm Lexant. “As a result, negotiations are at a standstill, especially for what concerns prime properties, as these are mostly managed by big real estate funds for speculation purposes and mainly focused on offices and retails, the drivers of the industry. Nevertheless, according to the trend started in 2017, real estate will report positive results also in 2018, thanks to foreign capitals and the activities of big companies. Logistics will have an essential role in the future. The political uncertainty is generally seen as a risk factor, as well as the uncertainty related to the NPL reduction. As a result, legal support has become more and more vital, considering the challenging negotiations between sellers (construction companies) and buyers (real estate funds and financial companies). A lawyer is supposed to assess and understand not only the legal matters but the commercial ones. The early stages of the operation are crucial: the preliminary due diligence (real estate, urban planning and financial aspects), negotiation concerning price, sanctions and contracts”.
Extensions are an emerging phenomenon on the Italia market, as stressed by Francesco Assegnati, a Cba partner. “Extensions concern the most appealing assets (offices and shopping centres in north-eastern Italy) as well as other areas that have never got much attention before. An example is the sale of the Centro Sicilia shopping centre which was acquired by an international fund. Furthermore, hospitality has grown, especially in southern Italy, along with the distribution segment in central Italy”. Concerning the common aspects of real estate transactions, Assegnati remarks that the new entries on the market “are characterised by the nature of the investor (which is indeed foreign), the use of instruments for the efficient asset management (Fia or Sicaf), and the new guarantee methods. They are the escrow account, independent guarantees and insurance policies which are well known and very appreciated by international investors. These new guarantee instruments are primarily used by sellers using all the assets originating from divestitures to settle a debt, like collective investment funds during the liquidation phase.
Milan is the best city “for residential investments, where several areas and real estate complexes (also of a different use) are being transacted to build new housing”, explains Enrico Del Sasso, Talea partner, tax legal advisory. “We’ve also reported a consistent and increasing interest from institutional and non-institutional funds (international as well) in long-term investments in commercial, hospitality and office assets in Milan. In a climate of political uncertainty throughout the country, the city is perceived as a solid economy. Regarding the rest of the country, residential and hotels are the most attractive segments. Concerning residential assets, house purchases destined to short-term rentals (shorter than 30 days, or Airbnb style) have increased. These rents provide better profits, although they’re a cause of litigations due to violations of the condominium regulation which generally doesn’t include such solutions. They are, in fact, actual hospitality businesses implying the respect of the rules concerning safety, decency and quiet in the building”.
“The demand by international funds for offices has focused on Milan, where trophy assets and other buildings in central and semi-central locations have been sold for significant amounts”, says Claudio Cerabolini, partner of the Real Estate team of Clifford Chance Italy. “Flexible spaces are an interesting new entry. They combine money saving with opportunities for socialising and networking. Sharing, however, doesn’t limit to offices only. Student housing, offering common areas and facilities, are also interesting. Other emerging segments are also hotels and logistics, as well as retail, which was very dynamic in the first part of the year but might suffer from the reduction of consumptions. All this translates into a lot of work for law firms specialised in real estate, especially international ones. The best are those firms capable of following the clients at 360 degrees, providing support in the legal and fiscal investment structuring, the set-up of funds and restrictions required, also from a legislative point of view, the funding, the actual investment, till the closure”.
Concerning the commercial segment, Italian real estate can offer good growth potential capable of inverting the trend of the last five-ten years. “The commercial segment focuses on high-quality assets”, clarifies Marco Lantelme from the Bsva. “The hotel segment has some operations requiring funding. On the contrary, industrial assets are indirectly connected to the State policies or to the investment policies of the single companies. The fact that the banks’ real estate team, which generally issues new credits, is increasingly independent from the restructuring team, which works on operations to be reorganised, is a sign that there is a growth potential for the market. Regarding retail, the ultra-high-net-worth individuals (Unhwi, people with personal assets for over 30 million dollars) have recently entered the market and taking the Italian residency to avail themselves of the new regulation. This might lead to potential purchases, as we’ve seen, or to the development of prime residential assets, villas and other properties, requiring adequate legal assistance”.
Italian real estate suffers from the current uncertainties to the point that it might be subject to speculations. “Just to name the most impacting factors, there are the uncertainty connected to the equity tax, infrastructure investments (especially high-speed transports), the closure of shopping centres on Sundays, the cost of money and consequently the interest rates”, explains Davide Braghini, partner of the firm Gianni, Origoni, Grippo, Cappelli & Partners. “Luckily, such elements deterring real estate investments are counterbalanced by positive factors. There is a growing interest for urban renewal which had started from the office segment. Moreover, we see the emerging trend of sustainable and socially aware real estate developments focused on the choice of materials, energy saving, the integration of new construction with the urban environment in order to enhance the quality of life in the cities”. For this reason, Braghini believes that “it’s essential for lawyers to know the key elements in the negotiations (e.g. green and Esg clauses, IoT infrastructures, Ip/It protections etc.) and for the team to have cross-disciplinary skills, including lawyers with different backgrounds, from urban planning to environment, from intellectual property to regulated services”.
The domestic real estate market will radically change in the next few years. Maurizio Fraschini from Jenny Associati explains: “The rise of e-commerce has lead investors to focus on logistic assets. Online shopping will change the role of shopping centres in the future. Once seen as a safe investment, they’ll have to find new uses to not end up like shopping malls in the US, old and empty. In addition, in Italy, the political debate over the closure of shopping centres and outlets on Sundays has created additional uncertainties about their future. The deep changes in the way of working and living have brought new flexible concepts such as co-working and short-term residences. The house is no longer an asset to pass to the next generation, rather something temporary. Investors are looking at new asset classes, like residential buildings to rent, social housing, senior housing and health care facilities”.
“Based on the operations we’ve been involved so far, investors generally focus on offices, shopping centres and logistics”, says Francesco Saltarelli, Sts Deloitte tax partner. “The recently announced reforms, like the possible closure of shopping centres, have made international investors doubtful. In some cases, they preferred to pause their operations and see how the situation evolves, as the reforms might impact their returns on the investments. Generally speaking, 2018 has seen the completion of many transactions in central and northern Italy, especially in Milan”. According to Elena Cardani, Sts Deloitte tax advisors for the Real Estate Team: “Real estate investment funds are still very interesting for international investors. Concerning taxation, they’re the most efficient instrument, considering that funds are income tax and Irap tax exempt. We’ve registered a lot of interest in real estate Sicaf, which offer the same tax benefits as real estate funds along with the possibility of being self-managed, without the need for an external asset manager. From an operational point of view, the regulation concerning the constitution of a Sicaf is rather complex. In some cases, we’ve had to clarify with the financial management some tax matters which were not clear”.
“It seems like the Milan property market, and that of many other cities are gradually recovering”, believes Mascia Cassella, partner of Masotti Berger Cassella. “Requests largely come from international investors looking for entire buildings in the city centre to turn into hotels. Some clients don’t require a broker or a real estate agent since they want to get in touch directly with the owners. The residential segment has also resumed growing. Transactions mainly concern prime properties due to the difficulties for young families to access a mortgage, making purchases difficult despite the convenient rates”.
Like many other industries, real estate has also been influenced by innovative start-ups in the way of managing business and commercial operations. “For instance, think about the platforms that have been popping out on the Italian market over the last months”, says Gennaro Sposato from Roedl & Partner. “This trend concerns various aspects of real estate, like the timely conclusions of real estate transactions. Other new entries are property management for short-term tourist rentals and real estate investments through crowdfunding. These platforms meet needs that the traditional instruments cannot satisfy, but they require adequate legal support to grant the compliance with the Italian law”.
Source: Italia Oggi
Translator: Cristina Ambrosi