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Stefan Wundrak

Some good news from Italy?

​Stefan Wundrak, Director of Research, Property, provides an insight into the changing retail market in Europe, following the European Commission’s decision to remove Italy from the so called “excessive deficit procedure” list as Italy’s 2013 government spending shortfall is expected to be just below the 3% ceiling.

​Let’s start with the bad news: The economy is still dire (-1.8% projected GDP contraction for 2013), but at least it seems to have reached the point of inflection, which means output, employment and retail sales are still falling but by a smaller and smaller rate. In fact, there is a good chance that the economy will bottom out towards the end of this year. This will have played a role in the European Commission’s decision to remove Italy from the so called “excessive deficit procedure” list as Italy’s 2013 government spending shortfall is expected to be just below the 3% ceiling (for comparison UK 7%, Spain 6.5%, France 4%, US 4%, Netherlands 3.5% of GDP respectively).

Italian retail sales have been falling since 2007 and declines are expected to last until late 2014. By the end of 2014, retail sales will have fallen by -9%, compared to -28% in Spain. Italians sit on one of the largest saving stocks in Europe and have been able to somewhat cushion their declining disposable incomes by adjusting saving rates. Italy’s saving rate has fallen from 16% (one of the highest in Europe) to 12% today. Also, Italian private debt, in stark contrast to public debt, is the lowest in Western Europe and has been rising over the last two years, subsidising current spending levels.

The retail market is sharply polarised along the lines of location and quality. Falling sales continue to put pressure on rents, and retailers are getting into the habit of asking for rental discounts. Worst affected are electronic retailers, who now have Amazon breathing down their necks, transforming Italy’s backwater e-commerce market. In 2011 even fashion sales turned negative for the first time since records began, which says something in the world’s most fashion conscious country.

At the top end of the market things look different. Prime shopping centre and high street rents have remained stable since 2007, as many international retailers continue to expand and compete for the best space. For example, this spring H&M opened its first store outside of Sweden of its more upmarket sub brand “&other stories” on Milan’s top high street, Corso Vittorio Emanuele. It replaced an H&M, which will move just next door in a former hotel, creating a 4,000 sqm flagship store. It will be the largest H&M store in Europe. In fact, the waiting list of international retailers pushing into strong locations has the same names on it as the ones in Germany or the UK.

Polarisation between locations is typical for contracting markets, but in Italy, tourism reinforces the trend in favour of top high streets and outlet malls. About 44 million people travel to Italy per year, compared to about 60 million to the US and 28 million to the UK. Lately European tourist numbers were dwindling, but hotel rooms that were previously vacated have been filled with new travel and spending hungry Asians and Eastern Europeans.

On the investment side, there still is hardly any activity, despite agents reporting a high number of enquiries. Mid May, the Qatar sovereign wealth fund was first out of the blocks by taking a 40% stake in Hines’ € 2bn. newly-built Porta Nuova Garibaldi business complex in Milan. This week Axa followed: backed by capital from France, it acquired Bodio Center Milano, a 12 year old good secondary office development from Aberdeen’s Degi international, a German open ended fund due to be wound up by October 2014. What all these early bird deals have in common is a seller under pressure resulting in significant price discounts for brave first mover investors.

Stefan Wundrak

Stefan Wundrak

Head of European Research

Stefan's biography