An Italian real estate renaissance?

A significant gap between pricing expectations among real estate vendors and buyers has left Italy in ‘standby mode’. But, to quote Bob Dylan, the times they are a-changin.

A number of factors have hurt Italy: from scarcity of debt and its cost; international market turmoil; and internal political instability (Monti’s government steps down next spring when his term of office expires); to high sovereign debt, which has exacerbated scepticism about the reliability of Italy and forced austerity measures that have hindered the economic growth.

Yet, in my view, a period of ‘change and reorganisation’ is an occasion to promote a re-shaping of the market fundamentals, and challenge the thinking that the Italian real estate gap is a question of pricing. And if Italy can meet its challenges there is a real possibility to reawaken real estate by the end of 2013. So what are the steps that Italy must take?

Simple rules

Law No. 1150/1942 is the backbone of the Italian zoning discipline. Seventy years old on 17 August, it’s not without its faults. For example, constructions without building permits were a common phenomenon in Italy through the ‘80s. And, following a constitutional reform in 2001, Italy witnessed the proliferation of diverse regional town planning laws, as well as law decrees which, in spite of their goal to stimulate the economy by means of speeding up the building procedures, produced a situation of legal uncertainty.

Since Italy can no longer afford the inefficiency deriving from fragmented and contradictory building and planning rules, we need Law No. 1150/1942 to re-assert the return to a clear national and centralised framework,


From the retroactive amendment to the Italian real estate fund taxation (law decree No. 78 of 31 May 2010), to the 15% mandatory reduction of the rent paid by the public administrations (law decree No. 95 of 7 July 2012), Italy shows a questionable attitude, which disincentives international investors in a short-breathed and ill-fated effort to cope with the government deficit.

At the same time, local administrations’ planning and building procedures are affected by both significant delays (despite the reasonable time limits required by law) and by the swinging attitude of the different governments.

Real estate needs a completely different approach based on the pacta sunt servanda (“agreements must be kept”) principle. The latest previsions about the personal responsibility of public officers seem to go in that direction.

Market sustainability

Sustainability is not only a ‘going green’ take, although the responsible use of land and the incentive to energy efficiency seems to have eventually kicked-off in Italy. Every real estate initiative needs to take place with a quality product in terms of its capacity to meet consumer expectations and with an affordable financing structure.

In Italy, much real estate stock is far from the European quality standards. For example, class A office buildings in prime business locations continue to be below the demand. There is room for both retail parks and affordable housing structures. But there is not yet sufficient demand. At the same time, financial support is essential for any development or real estate transaction. Alternative finance structures (debt funds, insurance companies’ investments, bonds) are already common in Europe, while Italy still faces both legal issues (the banks’ reserve for lending activities) and policy-making concerns (the threat of penalties provided for the so-called shadow banking).

A place to be

There’s no doubt that Italy has significant challenges, but Italy has the capabilities to take full advantage from the global awakening of the real estate sector that sooner or later will knock at the Italian door. After all, Il Bel Paese (Italy is the global leader for historical landmarks with more UNESCO world heritage sites than any other country) has never dashed international investors’ expectations when it comes to delivering stable and secure incomes, or aiming for higher returns.

Italy is the third economy in the euro-zone with a GDP of €1,560 billion and the second industrial economy after Germany (the seventh world’s largest exporter in 2010), with a significant private wealth. Indeed, Italian families have the lowest rate of debt within the G7 countries, with less than €25,000 per adult – less than 10% of private wealth. In this environment, Italian real estate investment funds grew during the past ten years from some €4 billion of asset under management to €51 billion, continuing their growth during the crisis, though at a slower pace.

So from where can a new Italian renaissance in real estate emerge? The government is putting in place a huge program for the valorisation and selling of €300 billion in public assets. Many of these are located in the most interesting areas of the Italian business cities, such as barracks, redundant offices and railway areas.

Look no further than Milan, the financial capital of Italy: placed in the middle of one of the wealthiest and most industrial areas in Europe, it is living a strong renewal process, both for infrastructures and real estate. Perseo is a 16, development built in the Expo 2015 district of Milan on an undeveloped site. It was among three ULI Awards for Excellence in the Europe, Middle East, and Africa region made in 2011. While Rome, with its massive necessity of offices for administrative and government activities and a constant demand for hospitality, continues to represent one the safest market in Europe. Che la rinascita cominci.

Guido Inzaghi is a partner at DLA Piper and is chairman of ULI Italy.