Italian Real Estate Activity Plummets

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Facing a bleak macroeconomic environment and highly uncertain political future, the volume of real estate transactions in Italy fell sharply in the fourth quarter of 2012.

Real estate deals  dropped 29.6 percent compared with the fourth quarter of 2011, according to the Quarterly Note of the Osservatorio del Mercato Immobiliare, prepared by the Agenzia delle Entrate. The NTN Index, a measure of residential transactions, fell 30.5 percent in the quarter compared with the same period a year earlier.

On a geographic basis, the index fell 31.7 percent in the north, 31.9 percent in the central region and 27.4 percent in the south. There was no significant distinction in activity between key urban and rural areas, with rural area activity dropping 26.1 percent.  On a city basis, the worst performer was Genoa, where activity declined 26.1 percent, while Naples was the best performer with a slight 0.8 percent decline.

Residential sector transactions were impacted by a contraction in lending activity.  Residential sector loans in 2012 amounted to approximately 19.6 billion euros, an almost 43 percent drop compared with 2011.  As Italy's macroeconomic risk profile pushed up capital costs, average mortgage rates  increased from 3.37 percent  to 4.25 percent and average loan periods tightened from 23.4 to 22.9 years.

Beyond the residential segment, the tertiary segment, which includes offices; the commercial segment, including stores, malls and hotels; and the productive segment, including industrial space all dropped sharply, according to the Quarterly Note.  Activity in these segments fell 25.6 percent, 23 percent and 17.1 percent, respectively.

While it is difficult to find a bright spot in the Italian market, the fourth quarter marked an improvement over third quarter results, particularly with regard to the residential segment.  The number of adjusted transactions in the residential real estate sector in the fourth quarter was 118,205, significantly higher than the third quarter result of 95,989.  For all sectors, the number of transactions was 270,359, the highest of the year and a significant jump over the  third quarter total of 213,860.
 
While the fourth quarter numbers show a quarterly turn for the better, it is difficult to envision a short term return to market health.  Domestic demand will remain limited due to the negative macroeconomic environment, declining consumer confidence and tight credit markets.  Recent announcements of investigations of several  Italian banks over undisclosed derivatives trading activity will likely further cause lenders to take conservative credit exposure positions.

Another phenomenon which has restricted activity: real estate prices have not dropped significantly to reflect the low transaction volumes.  One of the reasons for this is that banks holding non-performing mortgages have generally preferred to restructure loans rather than seek to enforce mortgages in a court system where the process can take years.  As a result, real estate prices have remained artificially high at a time when the ability of persons to pay those prices has declined.