What is the secret to the purchase of an excellent real estate asset in the context of an increasingly complex market? “Buying in areas where estates are a scarce asset”. This is Luca Dondi’s, CEO of Nomisma, answer to the question, at the presentation of “Coupon vs. brick: where true profitability goes,” which the company organized alongside T.Rowe Price. According to Dondi, in fact, “In order to invest satisfactorily in real estate, one must buy in thriving economic centers or art cities because everything else is exposed to risks, not least of which is the demographic factor, which is one most buyers do not take into account.”
Given the critical conditions of the demographic situation in which Italy finds itself, Marco Daviddi (EY), in an event organized by Scenari Immobiliari, points out, “The current balance is negative in most Italian Cities, as well as the migration balance. In addition, the average age of the population is increasing: in Milan, Rome, Naples, and Turin it is about 48-50 years old while in the other Major European cities it is around 35 years old. And 15 years can determine the future and fate of a country. One cannot talk about the future of housing without taking into account the demographic risk to avoid creating expectations that, considering the duration of the housing cycle, may, in some way, fail.”
The long stability of the real estate market is greatly influenced by demographic factors, which pose risks of an imbalance between supply and demand due to the negative population growth in Italy. In fact, Istat estimates an average population decline rate of 2.5% by 2030, projected to worsen to 3.3% by 2050.
Milan: a separate case study in the Italian real estate market
A separate case is represented by Milan, which shouldn’t be compared to other Italian cities but rather international ones. “Milan is a city that grows at a pace 4-5 times faster than Italy and attracts foreign investments, keeping property prices high. It follows the dynamics of other European and international cities. The trends of other primary cities such as Rome and Naples are more similar to those of secondary cities like Livorno, Taranto, and Novara, albeit with different prices,” clarified Dondi.
Alternative options to real estate: coupon bond funds
“The great interest in the real estate market is no surprise. However, it should be considered within a diversified portfolio along with other instruments in the securities market,” commented Donato Savatteri, Head of Southern Europe at T.Rowe Price, who suggests alternatives. “In this context, investment in coupon bond funds can synergize with real estate investment, proving particularly suitable for a portfolio biased towards real estate, as depicted in the study, where real estate assets account for an average of 55% of the portfolio.” There is also an additional advantage: “Investing in a fund allows for easier ‘maintenance’ and greater flexibility, as the fund can always be liquidated immediately,” Savatteri added.
Trends in the Italian Real Estate Market
Recent data has shown a continued decline in the residential real estate market in Italy. After a 2.1% decline in the fourth quarter of 2022 compared to the same period in 2021, the first three months of 2023 marked a further decrease of 8.3%, with 166,745 transactions (over 15,000 fewer). According to the analysis by Abitare Co, based on data from the Real Estate Market Observatory (Omi) of the Revenue Agency, the first quarter of 2023 saw a greater decline in capital cities (-10.6%) compared to non-capital cities (-7.4%).
At a territorial level, the largest decline was recorded in the capital cities of the Northwest (-12.5%), while the only increase occurred in non-capital cities such as the Islands (+2.3%). The reason lies in the more affordable prices in smaller municipalities and the higher prices in capital cities, where there is still no noticeable decline but rather longer negotiations.
What is happening in major Italian cities? In the first quarter of 2023, all the major cities recorded declining volumes, including Milan (-22.9%) and Bologna (-23.9%), which experiences the highest contraction. However, other metropolitan cities also experienced negative trends, albeit to a lesser extent: Rome -10.3% (8,274 transactions), Florence -9.4% (1,208 transactions), Genoa -5.5%(2,034 transactions), Palermo -4.4% (1,598 transactions).
“The increase in mortgage interest rates is affecting families’ purchasing decisions, and the desire for larger spaces that was observed in the post-pandemic period seems to have diminished. Purchases of apartments, especially those larger than 100 square meters, have declined. If there will be repercussions on sales prices, we will probably have to wait until the second half of the year to see a decline, primarily in older properties in need of renovation,” commented Alessandro Ghisolfi, Head of the Research Center at Abitare Co.
Mortgage trends
“The beginning of 2023 is proving to be a challenging period for the mortgage sector. The significant increase in Euribor interest rates, which have risen by nearly 3.7% from the lows of January 2022, is reflected in a clear reduction in the purchasing power of homes for individuals and families. Based on internal calculations, new borrowers with the same income now face a reduced purchasing power of over 25%. Faced with real estate prices that show no signs of decreasing, high inflation levels, and general economic uncertainty, many consumers choose to postpone their housing projects. This is particularly true for the significant market segment of individuals under 36,” commented Stefano Rossini, Administrator and Founder of MutuiSupermarket.it. He concluded by saying, “The forecasts for 2023 actually indicate a double-digit reduction in sales (purchases) due to continuing restrictive policies in the mortgage market. At the end of 2022, the proportion of homes purchased with a mortgage stood at 42.8%, compared to 52% at the beginning of the year, highlighting that those who already have the money are increasingly making the purchases without needing a mortgage. The immediate effects are seen in postponed purchasing decisions, waiting for more favorable times, with incremental effects on the rental market, which is also under pressure from inflation and a generalized increase in tenant expenses.”
