Rents declining in Italian office market, says Gabetti Corporate (IT)

Over the past year a reduction in office rents has started to set in in Italy according to Gabetti Corporate. In the wake of a period of strong growth which characterized the years 2000 to 2002, rents continued to rise even if at more modest rates in the major Italian cities up until 2007, when values peaked. By the end of 2008, on a national level, rents registered a reduction of around 7% with respect to a year before.

Milan (-7.7%) and Rome (-7.1%) were in line with the national trend, while other cities displayed variations which, while contributing to the overall average, showed considerable differences. Padua and Bologna in fact registered the smallest reductions, dropping respectively - 3.8% and -2.9%, while Florence saw a more worrying fall of -13.2%.

Over the last year the vacancy rate has also slowly crept up in all locations. In general, in all the cities which were monitored, the further out that one moves from the center to the hinterland, the greater the year on year rises have proved with respect to 2007. In fact, while in downtown areas the average figure was 2.3%, an average vacancy of 5.3% was registered in the hinterland.

It is important to underline two key findings, the first with regard to Milan, where vacancy has risen at rather alarming rates in all locations; the second refers to Naples, which is in a similar situation to Milan, even if values have been more contained, particularly in the old center. In particular in Milan the current situation is due not only to the ongoing recession, but also to the great quantity of properties which have recently flooded the market between the semi-central area and hinterland.

Recently realized properties have suffered fewer vacancy problems, but older buildings, particularly those outside business areas or not served by the metro, have been hit harder. The city of Rome, on the other hand, has escaped the worse of the situation for a very simple reason – despite having a high number of projects on paper, work has not yet commenced on many of these and generally will not start until potential tenants have been found for the properties. Prime yields, on the other hand, in the second half of 2008, have registered increases in all areas of Italy, reaching a national average of 6.1%.

The period between 2000 and 2003 was marked by relative stability in terms of yields, against a constantly dwindling Euribor rate, but in the following years - in particular up until the end of 2007 – yields started to progressively decline, while the Euribor started to climb. The trend for falling yields was largely due to:

• The constant growth in demand for investment opportunities supported by relatively
easy access to credit for institutional investors;
• The progressive reduction in risk perceptions for the office sector

In 2008, everything changed, in the wake of the sub-prime phenomenon, as access to credit became progressively harder, provoking diminishing demand for investment opportunities. Those factors, alongside the worsening outlook for economic growth, contributed to a reversal in the trend from September 2008 onwards.

From 2000 to 2003, the Euribor seemed to have anticipated the trend which was subsequently followed by yields from 2003 to 2007, a period in which the interest rates consistently rose. If the rise in yields over the last year is likely to continue the trend set by the Euribor in the previous period (2004-2007), it is probable that another 2-3 years of growth in returns will follow.

On a local level, it is possible to identify average increases practically in line with national values in Milan and Rome, which have registered respectively a +5.3% and a +6% rise. The towns of Padua and Naples remain more distant from the national averages, registering respective rises of +2.1% and +15.4%.

2009 forecast
The described trend (reduction of rents and increase in prime yields) is likely to continue through 2009, with weakening effects in the second part of the year. Eventual signals of economic recovery might convince bank

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