By Tom Leahy on November 29th, 2016
Following “surprise” victories for President-elect Donald Trump and for the Leave campaign in the U.K.’s Brexit referendum, the next plebiscite – and therefore source of concern for market participants – is Italy’s referendum on Dec. 4.
The vote allows Italians to give their verdict on Prime Minister Matteo Renzi’s constitutional reform program and while this might appear to be a matter mainly of internal, political interest, there are good reasons for those in the international real estate industry to take note.
Why? Because Renzi said if he loses the referendum – which most commentators now expect – he will resign. The period of instability this would precipitate could have disastrous effects on Italy’s troubled and indebted banking system, with a negative effect on financial stability throughout the eurozone.
For real estate investors this comes at a time when the Italian market has witnessed substantial inflows over the last 24 months. The market barely saw any activity during the post-GFC period and then during the eurozone debt crisis in 2011-12, but investors returned in significant numbers from mid-2013 onwards. In fact, 2015 was a record year for the market, with more than €10b in transactions.
In relative terms, Italy is also one of the biggest cross-border markets in the world: 70% of the capital invested since the start of 2015 has been from overseas players and 20% of the total from new overseas entrants to the market. There is therefore, a growing cohort of overseas players with exposure to the risks arising from the referendum: RCA estimates that overseas investors hold Italian commercial real estate to the value of €50b.
Perhaps investors have started to take greater note of the risks posed by the referendum, with Q3’16 investment volumes of €1.0b the lowest since Q1’14. (Still, the drop-off is in line with a Europe-wide trend.) So far in Q4’16 we have recorded a relatively modest €650m.
On a trip last week to Bologna and Milan, I spied plenty of anti-Renzi graffiti and was given more than one leaflet from campaigners telling me to vote no in the referendum. And with anti-elite, populist movements gaining traction throughout the Western world, a vote against Prime Minister Renzi and his reforms should not surprise any owners of Italian real estate.