Just when the flow of real estate capital into Italy was as strong as it has ever been, the country’s embrace of populist politics has created the potential to upset the market.
Italy’s commercial real estate sector has experienced a robust recovery, led by demand in the office market, but also strength in retail, hotels and logistics. Its recovery has been underpinned by the increasing presence of foreign capital. In 2017, Italian commercial real estate attracted record-breaking investment of €11.4 billion, up 23 percent year-on-year, according to CBRE.
Industry players’ faith in the market will be tested by the turn Italy’s politics has taken, with the June formation of a coalition government between the anti-establishment Five Star Movement and the far-right League.
Political uncertainty adds a layer of risk to property lenders’ underwriting of Italian properties. It is a market that already poses concerns, with a convoluted legal framework which, despite attempts at reform, does not offer a clear or swift path to enforcing loans.
Another area that has become a little more uncertain is the non-performing loan market. For prospective buyers of distressed debt, it is yet unclear how the new government will support domestic banks’ efforts to offload legacy loans.
Currently, Italian banks hold around €200 billion of non-performing assets – the highest level in Europe, according to the Bank of Italy. Compared with its peak of €360 billion in 2015-16, the NPL market decreased significantly on the back of measures introduced by the former Democratic Party government, including through the creation of the Garanzia Cartolarizzazione Sofferenze (GACS) regime, through which the state guaranteed senior tranches of NPL securitisations.
The GACS scheme had been scheduled to end in September, although an extension has since been expected. However, the new ruling parties have remained silent on NPL reduction measures and it is unknown whether GACS will be continued.
Despite concerns, there are also signs Italy’s shift to populism might not have as big an impact as initially feared. A major worry was that an openly Eurosceptic government could drive Italy out of the euro, causing the default of its local banks, which are big holders of Italian government bonds. Fears, however, were last week calmed by Italy’s new economy minister, Giovanni Tria, who said his government has no intention of leaving the single currency. Nevertheless, the government still wants to renegotiate the basis on which its euro membership rests.
Debt providers should keep Italy on their radar. Lenders still stand to benefit from opportunities arising from the country’s macro-trends. Investment in the country’s logistics and alternative sectors, for instance, is providing senior lenders with higher margins than some Western European markets.
A consequence of the added uncertainty in Italy is likely to be lenders further raising margins to factor-in additional market risk. As pricing tightens in many European markets, senior loans provided by the banking sector are expected to rise from 80 basis points to 100bps, a local market player said.
Barely a month into power, the coalition has toned down much of its most extreme early rhetoric, to the partial relief of observers. However, the unpredictability of the government will continue to trouble property investors and lenders. The Italian market still has much to offer real estate players, but the political backdrop will inevitably cause many to pause for thought.
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