The call of the mall
Roxane McMeeken roots out the prime commercial property sites remaining in Milan and Madrid.
The world economic slowdown has touched Italy and Spain relatively lightly. As a result, introducing a Mediterranean flavour to a property portfolio looks appealing for more reasons besides presenting an excuse for a visit to warmer climes. However, conditions in the real estate markets in Italy and Spain are radically different. While Spain is an open market that is easy to enter and holds lots of investment opportunities, it presents a risky environment. Italy, by contrast, offers few opportunities, but those that exist are very good bets. “In Italy, the tax situation is positively burdensome, property investment is fraught with legal and political issues and there are major problems with transparency and liquidity,” says Nick Tyrrell, director of Deutsche Bank’s real estate investment division. He adds: “The supply situation is very tight. It’s difficult to find new space and if you do find it, a planning enquiry can take three years.” But it is worth breaking into this tricky market, according to Mr Tyrrell. The example of Italy’s prime real estate city, Milan, shows that the Italian property market should weather the present worldwide slump in demand particularly well. Simon Foxley, fund manager of the European value enhanced fund at Lendlease, says that when the drop in demand hit a year ago Milan was near the top of the cycle, so it still had much further to fall than, for example, Barcelona and Madrid, which were near the bottom of the cycle. Consequently, Milan looks set to recover much faster. In fact, it is Deutsche’s favourite city for property investment. But how is it possible to break into the Italian market? Mr Tyrrell says the key is to use a local agent. The lion’s share of the sparse opportunities is to be found in the retail sector around the outskirts of Milan and Rome. Milan is particularly interesting as its position as a European crossroads means there are good opportunities to build shopping centres on ring-roads currently being developed around it. Mr Foxley says there is such a shortage of shopping centres that “if you built 20 today you would find three people to buy each one”. Milan’s retail sector is broadly stable, according to Deutsche’s research. High street and other prime location rents are expected to maintain this year’s growth rate of 9.6 per cent and rents in non-prime locations expected to tread water, along with capital values. Real estate in Spain contrasts significantly. “Spain is a pretty open market,” says Mr Tyrell. “There are few restrictions, the tax situation is straightforward and so are the local planning laws.” However, Spain was at the opposite extreme of the economic cycle to Italy when the property demand slump arrived last year. As a result Spain is likely to take a long time to recover. Looking at one of the prime real estate centres of the country, Madrid, all sectors have doubtful futures. The industrial sector is stagnant, according to Deutsche. A lack of supply of industrial premises has caused a bottleneck and rents have kept on increasing. But a strong downward trend in industrial employment is expected to cull demand, leading to rent decreases. In Spanish residential property, although the market has seen a continual price hike in recent years, with a rate of growth of 21 per cent for the last quarter of 2001, Mr Foxley says that prices will stabilise in the next few years. This is especially because interest rates are unlikely to fall much further. In offices, demand halved in 2001, while on the supply side more than 500,000m2 of new space became available. There is a glimmer of hope in this sector, however, as foreign investors are selling some of the office holdings in their portfolio and moving towards retail or industrial property. This is leading capital values to decrease faster than rents, pushing yields upwards. Retail is the most promising sector, enjoying limited supply and burgeoning demand. Charles Graham, chief executive of Europa Capital Partners, argues that the retail sector throughout Spain is attractive. And Europa has indeed invested in shopping centres in south-eastern Spain and in a leisure and shopping centre in Barcelona. Likewise, Lendlease has just opened its first shopping centre – “Tres Aguas” – in Madrid. Deutsche agrees that Spanish retail will continue to see rent increases, but Mr Tyrrell warns that this will depend on consumer spending remaining strong.
