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Outlook for the Italian economy and the commercial real estate

December 2, 2022

By Giulia Ghiani

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The increased political uncertainty and the change of Government in Italy have created fears of a possible change of course in relations with Europe, in the management of public debt and in the focus on the country's financial stability and its effects on credit conditions. In the context of slowing economic growth and persistent cost-push inflation, monetary policy becomes less effective, and a great deal depends on the Government's ability to balance fiscal policies between the supply side (business support) and the demand side (public investment).

Several signs are creating optimism around Italy's ability to overcome the difficulties it is currently facing. Recent economic growth has surprised many with its intensity, and in 2023 it may well exceed expectations. Cost inflation is expected to come under control in the course of next year thanks to alternative energy supplies and the ongoing trend of commodity markets stabilising. Fiscal policy will be moderately expansionary on both the demand side and the supply side, supporting recovery under stable financial conditions.

The rising cost of capital brought about by restrictive monetary policies, worsening growth expectations for the near future, a picture of increased uncertainty and worsening investment conditions have led to a wait-and-see attitude from commercial real estate investors and lending institutions as of late summer 2022. This situation has been exacerbated by the volatility of commodity prices due to the negative effects on construction costs, which poses a challenge for the sustainability of new real estate developments.

From mid-2022 onwards, price adjustments in response to macroeconomic changes and shrinking business operating margins (higher energy costs) have led to an increase in commercial real estate yields across all asset classes. This process, together with a likely decline in investment volumes, will continue throughout the phase of monetary policy normalisation, commodity market instability and macroeconomic uncertainty, that will continue at least partly into next year.

There is no evidence, however, of Italy having a dynamic that diverges from that expected for the main European markets, either in terms of investment volumes or with regard to the dynamics of real estate returns, as Italian economic growth shows positive signs of resilience in the absence of signs of financial instability.