Unlike recent years, performance won't be driven by sharp yield compression and rental growth potential will become a consideration.
In retail markets, Henderson believes Italy will be one of the best performers in terms of rental growth over the medium term. This is perhaps surprising given the current sentiment over the Italian economy. The prospects for economic growth over the next few years are uninspiring, and indeed our outlook for Italian offices is weak to reflect this. Retail markets are less influenced by macro economic issues, with local market supply and demand factors being more influential. Retail rental growth in Italy is expected to come from supply and demand imbalances, rather than economic growth.
Italy is one of Europe’s largest consumer markets with above average rates of disposable income per capita, particularly in northern Italy. Yet the country has low levels of modern retail provision per capita. Northern Italy is more advanced in terms of retail development, but the south still has very few shopping centres. Retailing has traditionally been focused on high street shops within major cities, but increasingly units in historical city centres fail to meet the requirements of modern retailers. There is a significant amount of retail development in the pipeline for Italy, generating opportunities for overseas investors to access this competitive market, but even if all planned schemes are completed, supply per capita will remain below average.
Constrained supply means shopping centre availability rates are, on average, the lowest in Europe. So although the consumer economy may be faring poorly in growth terms, retail sales are concentrated on fewer, more efficient and expansionist retail businesses which should translate into good rental growth.
Current pricing in the occupier market also implies scope for rental up-lift. Low levels of supply, improving covenant quality of the occupier base and low vacancy levels have not yet been priced into rent levels. Henderson forecasts retail rental growth in Italy to average over 3 per cent per annum over the coming five years on the back of further consolidation in the occupier market and an ongoing supply/demand imbalance.
Alice Breheny, manager, Henderson Global Investors, Property.
