Real Estate Market 2023 in Italy

2023 close with over € 6 billion in investments: logistics is the first asset class of the year.

Office, hospitality & retail show signs of increased activity in the fourth quarter.

The occupier market remains dynamic, with the logistics and Rome office sector standing out.

The fourth quarter of 2023 – according to the analysis conducted by the Dils Research Team – witnessed the volume of real estate investments in the Italian market reaching approximately 2.6 billion euros. It emerged as the best quarter of the year, marking a growth of over 70% compared to the previous quarter and exceeding by about 14% the same period in 2022. The year-end result reaches 6.2 billion euros, half the volume recorded in the previous year, which had represented one of the best historical performances in the Italian market.

Despite a period of investment contraction, there’s a noticeable upward trend quarter after quarter, culminating in Q4 showing values in line with the average of the previous five years. Particularly, after nine months characterized by a better performance in Alternative and Living sectors, Q4 highlights the return of a certain dynamism related to more traditional asset classes such as Office, Hospitality and Retail.

The Logistics sector confirms its leadership in real estate investments in Italy, with a total volume in 2023 of over 1.6 billion euros. In the fourth quarter, operations amount to approximately 650 million euros, contributing to position the sector as the main asset class with a 27% share of the total, despite the ongoing yield growth phase, with prime net yield reaching 5.5% in Q4.

In the last quarter, the absorption of spaces has been in line with previous quarters, totalling approximately 680,000 square meters, marking an 8% growth compared to the previous quarter. As a result, 2023 concludes with a slight increase (+5%) compared to the take-up level reached in the previous year, setting a new record for the Italian market.

The high demand for spaces, coupled with limited supply, has been decisive in driving sustained rental growth, with prime rents now observed in Milan and Bologna at 67 €/sqm/year (+12% from 2022). Additionally, in this last quarter, there are increases in prime rents in the markets of Piacenza and Verona, both at 57 €/sqm/year.

During the last quarter, although still far from the record results of 2022, Offices have shown investment levels in line with previous years. With approximately 630 million euros in Q4, thanks to the contribution of a large deal finalized in Milan’s CBD, the annual total stands at 1.1 billion euros. Furthermore, there’s a lively pipeline of new operations, particularly in the Rome market, expected to close in the coming months. Prime net yield sees an upward adjustment, nearing 4.0% in Milan and 4.5% in Rome.

In 2023, Milan’s office letting market recorded a take-up of directional spaces slightly below 500,000 square meters (a light decrease compared to 2022). Approximately 160,000 square meters of these spaces were leased in the last quarter. 2023 concludes with a compression of vacancy in the most consolidated submarkets, with availability rates below 3%. Tenant preference for high-quality spaces is confirmed by transactions in grade A/A+ properties, which in 2023 represent 80% of the total. Regarding rents, the prime rent of 700 €/sqm/year remains consistent, with a potential growth outlook in the coming quarters.

In Rome, take-up reached around 255,000 square meters during the year, of which nearly 70,000 square meters in Q4, marking an increase of about 65% compared to 2022. This result marked one of the best performances ever achieved, second only to the record year of 2019. The Roman market continues to show increasing demand for high-quality spaces, with limited availability – even absent in some locations – of grade A and A+ products. This scenario contributed to the increase in prime rents, which in the last quarter of the year reached 580 €/sqm/year.

Living, with investments of almost 200 million euros in Q4, of which nearly 90% concentrated in Milan, and a total of 730 million euros throughout the year, continues to increase its weight within the Italian landscape (12% of invested volumes). Despite sharing the general decline compared to 2022’s performance, developers and investors’ interest in this asset class is consolidating quarter after quarter.

Focusing on the residential sales market, the number of transactions in Italy has almost reached 508,000 units in the first nine months of 2023 (-11.8% compared to the record year 2022), with over 157,000 in Q3. The slowdown is mainly due to increased interest rates, making access to credit more challenging.

Regarding major cities, in Q3, Milan shows an 8.5% decrease in the number of transactions compared to the same quarter in 2022 – a decline less pronounced than in previous quarters – and stays just below the average of the last 5 years (excluding 2020 due to Covid). The contraction is mostly observed in the second-hand and investment markets, also due to increased competition from other forms of savings management, such as government bonds, which have been highly successful.

In the Rome market, there is a 13% decline in transactions, spread across all size categories.

Q4 2023 proved to be a particularly active quarter for the Hospitality sector, with almost 600 million euros in investments, making it the best quarter for this asset class in the past two years. 2023 thus ends with a strong recovery as the total volume reaches about 1.1 billion euros, emerging as one of the asset classes with less contraction compared to 2022.

For the Retail sector, Q4 also represented the best quarter in the last two years, with about 460 million euros invested, allowing the asset class to reach an annual volume of ca. 700 million euros, mainly due to a mix of out-of-town portfolios and the return of significant transactions in the shopping centres and Milan high street segments.

In Q4, the Alternative sector attracted a lower volume of investments compared to the previous quarter, amounting to 60 million euros, still reaching an almost 900 million euros total in 2023. Particularly, the Healthcare segment showed an investment growth (approximately 600 million euros), more than doubling the 2022 result and significantly increasing its weight within the Italian market, from 2% to 10% of the total invested capital.

After the negative impact generated by the changed financial environment in the first part of the year, which slowed transactions, the market has shown a more dynamic phase in the last quarter. The stabilization of volumes and the improvement of more established asset class performances could contribute to a trend reversal, also supported by the gradual, albeit slow, effectiveness of the repricing process, backed by expectations of a decrease in interest rates in the second half of 2024.

According to the Dils Research Team, the market in the next 12 months will be characterized by the combination of two phenomena: on one hand, a stabilization of investment activities in more consolidated sectors such as offices and logistics, and on the other hand, the development of sectors linked to strong-growing social and economic macro-trends such as Education, Healthcare and Wellbeing, Infrastructure.

Furthermore, there will be an acceleration of the hybridization process involving traditional asset classes, primarily offices and residential properties, whose formats will be adapted to the new needs arising from contemporary lifestyles and the centrality of ESG standards.