At the moment, investors are focused on the most important cities: Milan, Rome, Florence, and Bologna, for sure. There are other cities with the larger good tradition and a large number of students, and if you think of the so-called smaller cities, between 15,000-50,000 students in Italy, we have at least 25 cities.
Focus on Secondary & Emerging Markets
Investors should also focus on these cities with a portfolio strategy because these cities have much lower competition. Everybody wants to go to Milan, Florence, and Bologna, but at the same time, in Milan, you have a massive pipeline.
Milan will be close to saturation, especially if everybody is targeting the same group of students, while in the other cities, there is much less competition. Of course, you can expect a different rental level than the city center of Florence or Milan, but simultaneously, you can build a landmark building in those cities and reduce the overall risk. Investors should diversify in terms of cities and locations by deploying some money and resources in different cities.
Italian Markets Have Barriers to Entry: Have a Good Team in Place
Investing in Italy is very complicated, and investing in the city center of Florence is the most complex thing in Italy at the moment, so you need to have good advisors, lawyers, and a good team because each city is different. Unfortunately, Italy is a fragmented country regarding PBSA rules, destination of use, and so on.
Why Operations are Important in Italy
With this new wave of development and new openings, we have more operating partners familiar with the international markets and can bring good practices in Italy and act with management contracts; this is important because it improves the capital values at the end of the investment, making investment more profitable. We have been familiar with the traditional lease contracts in Italy for a long time, with a low proportion between the rent and the revenues. And so it’s essential is this mix of international and national operators trying to compete with each other. The Italian operators are reacting very well and trying to expand abroad. This is very important for the industry because the operating company is critical for the success of the asset of a portfolio platform and so on.
Financing is Challenging in the Current Environment
Especially now, I think it’s challenging to find a good financing opportunity because the interest rates are increasing. The LTC and LTV are decreasing, and the banks are very selective and cautious, so they tend to finance only the clients they know. For the sponsors, it’s tough.
According to our capital advisory team, which works a lot with financing institutions, if you have started the construction, you can get better conditions, and it becomes easier. Also, Italian banks can be part of the play if you have a complete running asset.
The financing conditions at the moment are the central issue of this market, and it has to be understood if this is going to stop or if this is going to deteriorate further.
It will be different from city to city because in towns like Milan and Rome. There are alternative uses that can compete with PBSA, and maybe they are more profitable, and so in these places, I don’t see adjustments of land values in the other cities where the alternatives are not so big, for instance, if you have a significant office sector or hotel sector.
Reasons for Optimism
We should be optimistic even if the context is not the best. Unfortunately, from the investment side, with yields and financing, the situation is really bad. However, we should also consider the other side of the market: the occupier market, the rental growth, and the sector’s fundamentals. If we can navigate this moment and the next two quarters, I’m sure the market will be rewarding, especially in Italy, because the fundamentals are excellent, and we need the macro conditions to adjust to more acceptable levels.
– Marco Di Terlizzi, Student Housing Director – CBRE Italy, recorded remarks at SHURE Initiative Europe Emerging Markets, 10 October 2023 in Zurich.