On a macroeconomic level, interest rate developments drove a decline in transactions in 2023 and interest rate pressures continue to impact prices and weaken yields. While the outlook for the Italian economy remains uncertain, short-term inflation is following projections and there is cautious optimism that 2024 will bring increased stability in interest rates and lead investors to equity and higher yield potential across multiple asset classes.
Italy has encountered challenges related to regulatory frameworks, taxation, and economic fluctuations, which have subsequently impacted real estate investment. Navigating the legal and regulatory landscape, understanding tax implications, and mitigating the effects of economic variations will be crucial considerations for foreign investors operating in the Italian real estate market.
Amidst these challenges, the Italian real estate market continues to offer opportunities for investors to generate steady income streams, particularly in segments such as high-luxury residential properties, sustainable developments, and emerging trends such as co-living projects. Strategic investment in these areas, coupled with a nuanced understanding of the market dynamics, can position investors to capitalise on the potential of the Italian real estate market as it continues to recover.
Central to their success will be engaging with environmental, social, and governance (ESG) considerations, which have gained prominence and increasingly influence property development practices and investment decisions. Despite macroeconomic headwinds and an uncertain geopolitical landscape, real estate investors will continue to incorporate high standards of sustainability and ESG principles into their investment strategies to align with evolving market expectations and regulatory requirements.
Logistics & industrial
The sector has shown itself to be resilient due to historically low rents, high yields, and low capital values. Today, the continued evolution of eCommerce and growing demand for efficient supply chain solutions indicate the sector represents growth and opportunity; the majority of existing stock is relatively old, and vacancy is very low, but investors hold a preference for modern, well-equipped, and sustainable real estate meaning there is enormous potential.
The strategic location of Italy as a gateway to Europe further enhances its appeal for logistics and distribution activities, making it the leading asset class for investment in Italy and attractive to investors. As in other European markets, interest rates, higher construction costs and legislative restrictions have impacted the volume of new developments. However, the focus on sustainability and technological advancements within the sector is expected to drive interest from investors seeking long-term value and growth potential.
Retail
Once the leading asset class for investors, the Italian retail sector continues to evolve with a growing emphasis on retail parks as the sector adapts to new trends and retail investors seek strategic investments that align with the transformation of retail spaces into dynamic, multifaceted destinations. This shift offers investors the chance to reimagine traditional retail spaces and create innovative, engaging environments that are resilient to digital disruption and cater to changing consumer behaviours.
Prime retail locations in iconic Italian cities hold enduring appeal, providing a solid foundation for investment in high-traffic areas, with demand in major global capital locations like Milan and Rome seeing yields continuing to rise. Investment in High Street opportunities also exist in secondary locations as levels of tourism see consistent annual increases. The market shows saturation is low and despite the challenges posed by the growing influence of eCommerce, opportunities are expected for creative investors to capitalise on the country's vibrant consumer market.
Residential
The allure of Italy's rich cultural heritage and natural beauty continues to make it an attractive destination for residential real estate investment, particularly for foreign buyers of historic and luxury properties where demand often exceeds supply. The slowdown in transactions over recent years in this class is anticipated to stabilise as interest rate pressures ease and prices rise to deliver greater yields.
Buyers seeking high-quality, sustainable housing in urban centres have led to a surge in demand for multifamily assets, pushing up prices in major cities where new development is limited, and mortgage rates deter property purchases. Similarly, alternative asset classes such as student accommodation and senior housing offer appealing investments as the ongoing shortage of suitable solutions ensures demand remains robust.
A growing emphasis on remote working and sustainable living has led to a shift in priority toward quality of life over proximity to work, creating exciting opportunities for investors to leverage tax incentives and help revitalise residential properties in rural areas with less tourism. Overall, environmental considerations will become increasingly important as EU regulations mandating minimum energy performance for new developments grow closer.
Offices
Urbanisation trends have concentrated activity in major cities, with Grade A office real estate in prime locations remaining the priority focus for investors and ESG, location, and access to talent acting as key factors in investment decisions. The evolving nature of work patterns is seeing businesses value the agility and cost efficiencies of mixed-use developments and flexible spaces such as co-working and serviced offices, creating opportunities for investors to repurpose underutilised properties or reposition existing assets. As a result, vacancy levels have stabilised, and expectations are that prime office assets will see modest rental growth this year.
Offices felt the greatest impact from COVID-19, but Italy shows a high rate of return to offices compared with many European markets. As businesses look to optimise utilisation levels, the integration of technology and the focus on creating collaborative, dynamic spaces align with new workplace strategies and the changing needs of tenants demanding smart solutions. This will manifest itself in a flight-to-quality, with superior office stock being of greater interest to investors than commodity spaces.
Hospitality
Although the value and volume of transactions slowed in 2023 due to high interest rates and rising costs, these factors are expected to ease during 2024 which will reduce financing costs. Occupancy levels are expected to return to their pre-COVID-19 levels as tourism demand continues to strengthen, although visitor profiles have changed due to geopolitical influences.
With a growing emphasis on sustainable tourism and high-end accommodation, prime assets in the luxury sector are expected to maintain their yield profile and interest in the class will remain high among foreign investors. The country's diverse offerings, from historic city centres to picturesque coastal regions, provide abundant opportunities for innovative hospitality developments that tap into structural shifts such as growing population with increased leisure time and a focus on unique experiences.
