In 2020 the real estate market trends were better than expected. The -7.7% drop in the residential transactions market was surprising: the general macro-economic conditions prospected a far worse drop, but, on the contrary, especially in the second half of 2020, the market bounced back and this translated into a continuous recovery, totaling 558,000 purchases and sales by the end of the year.
Real estate market forecasts: the need for caution
Although faced with a result which, although negative, is better than expected, this does not mean that we can abandon a cautious attitude. There is still fear that the market can collapse more than has been recorded thus far, also due to the risk of the conjunctural crisis continuing further.
For 2021, the growth forecast for Italy is higher than for Germany, our benchmark industrial competitor. This means that there are interesting prospects for the economy in Italy, driven by the positive response of the manufacturing sector which, according to ISTAT data, has shown a positive figure, in contrast to other countries in the Eurozone which are in negative figures.
The reversal of expectations
The actual market behavior shows a clear reversal of expectations.
Prices of raw materials including oil – a key indicator for the whole economy – and copper – which is the forerunner of manufacturing expectations – have recovered significantly, from the minimum figures recorded in early 2020 to reaching maximum values, for copper, equal to those recorded in 2012.
The raw materials price trends, which are well above the recovery rates following the minimum values of the pandemic period, means that the manufacturing sector has resumed its activities. The signal of the economic recovery is also seen by the price trends of gold, the safe-haven asset par excellence, the trend of which is reversed compared to that of the above-mentioned raw materials, reaching its maximum value in the height of the pandemic followed by a lag period and a downturn which began in 2021, a sign that investors are disinvesting in gold to invest in industry and manufacturing of goods.
The Italian economic situation and the real estate sector trends
The overall situation in the country, grappling with the pandemic crisis, can be represented by what is defined as the “K of inequalities”, with one part of the country able to succeed in overcoming the crisis while the weaker part, already in crisis, falls back even further, with a consequent increase in poverty above all in the most productive part of the nation which suffered the greatest effects of the crisis.
The macro-economic scenario seems to have only partially affected the real estate sector trends. Support measures for families and businesses reduced the effects of the general economic situation on family budgets, propping up the propensity to purchase of families which has in fact remained unchanged.
Real estate and the credit system
A further element that helped to bolster the real estate sector was the behavior of the credit system.
Data show a fragility in the consumer system with a strong propensity to indebtedness of consumers, 8 out of 10 have to make recourse to credit for large purchases such as a home.
This situation is certainly facilitated by the current historical moment marked by much easier access to credit than in the past, with advantageously low interest rates. The state of health of the banks is also a contributing factor, with very positive data relating to non-performing loans caused by the excessively relaxed granting of loans in previous years, following the clean-up process of the last few years (from 2017 to 2020, NPE portfolios worth €214 billion were sold, the Italian NPE ratio falling faster than the European average – Source: Banca Ifis).
So, the banking system has played a significant support role for the real estate market, and we can see this from the data on the net mortgages granted (not considering subrogations), where, despite the fall in purchases and sales, this has remained substantially unchanged and aligned to the values of previous years.
All these data, however, do not clear up the doubts over the sustainability of the debts incurred by families, with signals that should not be underestimated: analyzing the results of the moratoria on loans, we can see that over ¼ are at risk of impairment, the default rate of impaired loans showed a - small - reverse trend, and began to rise again (+1.4%) after years of constant reduction and with overdrafts increasing significantly (+47%).
The real estate market remains attractive to investors
In the real estate field, the market remains attractive particularly for those consumers/investors who, more than at the profitability of the investment (the average gross profitability stands currently at 4%) look at the property purchases as a kind of safe haven that safeguards and maintains the invested value over time.
In the residential sector, the intermediate centers markets have shown performance (assessing the sales dynamics, price trends, discount applied, time spent on the market) that is still positive, in contrast to the average trends of major cities. This is not reassuring data, as the large centers anticipate the trends and the trends we will then find in the rest of the market, so the difficulties now seen on the main markets will arrive later on the markets in secondary cities.
The difficulty in making forecasts
It is very difficult to make forecasts on future market trends, as there are too many variables dependent on the conjunctural development of the macro-economic scenario and the ability of the credit system to continue to support the market, as well as the closer attention paid to selecting which loans to grant.
The corporate market also shows negative values, with a fall in investments of over 28%, a greater drop than other European countries with a reduction also in the rate of investments in the Italian market out of the total of European investments (3.2% in 2020).
The number of foreign investments has also dropped, in 2020 standing at 48%, with an increase in domestic investments which helped to reduce the market downturn.
Some types remain important in the asset allocation field, even though there has been an increase in the focused types, particularly in logistics and the residential sector, which is slowly being defined as an authentic asset class. (link to the article Residential asset class: new attraction for investors).
The new real estate market trends
To conclude, in 2021 the real estate market trend is significantly affected by the uncertainty linked to the COVID-19 pandemic, at the end of the support measures implemented and due to the more selective role of banks in granting loans. But a greater accent can be placed on the new trends and opportunities recently highlighted in the real estate market:
- in the residential sector, the demand for multi-purpose housing including work spaces, by virtue of the introduction of smart working formulas within residential complexes with outdoor spaces and condominium services;
- for offices interventions with high added value are expected in order to tackle the new demand deriving from the new work methods and the related changes in business organization;
- in logistics, the growth of e-Commerce is leading to an evolution of the so-called last-mile, with the creation of logistics hubs outside the cities and urban warehouses in the center.
Article by Augusto Vassallo, Ufficio Studi e Reporting (Studies and Reporting Office), Morning Capital
Source: 1st Real Estate Market Observatory 2021 - Nomisma