Consolidation of the recovery in 2019-2020
ITALY: INVESTMENTS IN BUILDINGS
| BUILDING INDUSTRY | 2017 values € mln |
2017 | 2018 | 2019 | 2020 |
| RESIDENTIAL of which: - new * - renovations * |
75,061
15,483 49,755 |
2.9
0.5 2.5 |
2.6
1.6 2.5 |
1.3
1.8 1.2 |
1.3
2.3 1.0 |
| NON-RESIDENTIAL | 39,919 | 1.5 | 1.7 | 2.0 | 2.4 |
| PUBLIC WORKS | 22,910 | -2.1 | 0.3 | 2.5 | 6.0 |
| TOTAL BUILDINGS | 137.890 | 1.6 | 1.9 | 1.7 | 2.4 |
* net of property ownership transfer costs
Building and construction continue their gradual recovery
In the third quarter of 2018, investments in the sector recorded growth of 0.5%, slightly decelerating compared to the previous quarter, with increases in the residential area and other sectors respectively of 0.6% and 0.3%. Compared to the corresponding period, investment growth was 2.4% on average for the three quarters.
Market situation information is variable but on the whole tends to highlight a continuation of the expansion phase. The trend towards stabilisation of production facilities is confirmed thanks to the recovery seen in September. The index of confidence among companies operating in the sector, on the other hand, fell back in November, following less favourable assessments of orders and business trends; however, it still remains at high levels since the end of 2007.
Table 1 - Construction investments by sector (% variation over previous quarter)
[total = dark blue; residential = blue; other = light blue]
Source: Prometeia analysis of Istat data
Table 2 - Index of production and confidence among construction companies (2010 = 100)
[index of confidence = blue; index of production = light blue]
Source: Prometeia analysis of Istat data
In particular, in the residential area, there are positive indications for building renovation and energy redevelopment projects, which continue to make a significant contribution to business activity in this sector thanks to impetus ensured by tax incentives.
Furthermore, the resumption of permits to build new homes is confirmed (trend of 8.6% in the first quarter, following an increase of 11.2% in 2017), which in turn suggest a reversal of the trend for new residential construction. The positive figure for permits also extends into the non-residential sector, with an increase in terms of new areas granted of 29.3% in 2017 and an additional trend of 53.2% in the first three months of 2018.
Dynamics on the property market are contradictory
House sales in the third quarter of 2018 saw a 6.7% increase on the corresponding period, confirming the consolidation of the expansion phase underway almost uninterruptedly since 2014. All territorial areas show a more or less emphatic positive trend, including the main cities, with the only exception being Milan where a negative result was posted after 20 quarters.
Table 3 - Permits for residential buildings (thousands, cumulative over 4 quarters)
Source: Prometeia analysis of Istat data
Although transactions have grown for many quarters, the fall in house prices has not yet stabilized. The trend is still negative (-0.2% in the second quarter) as a result of a further decline in the existing housing segment and a recovery in the new home segment over the past three quarters.
In the non-residential market, on the other hand, signs of a setback in the positive trend are beginning to emerge; the tertiary-commercial segment once again posted a downturn, after thirteen quarters of uninterrupted growth, largely because of the decline in office premises (-20.8% on the corresponding period). Production facilities also posted a negative performance (-6.5%).
Table 4 - Non-residential building permits (thousands of m2, cumulative over 4 quarters)
Source: Prometeia analysis of Istat data
Table 5 - House sales and prices (2010 index = 100)
[house prices = blue; transactions = light blue]
Source: Prometeia analysis of Istat and Inland Revenue data
The weakness of the public works sector continues
Measures aimed to revive public investments launched in recent years are still struggling to materialize in effective form. The Update Note to the DEF published last September estimates a further decrease for 2018 (-2.2%) in gross fixed investment expenditure by Public Administrations, compared to the previously formulated forecast for a nominal growth of 2.5%. In particular, the negative trend in capital spending by local governments continues, confirming the difficulties - first of all, the loss of design capacity - which have so far prevented the exploitation of opportunities linked with the new public finance regulations replacing the Internal Stability Pact.
However, the resumption of activities by the main contracting stations that started in 2017 seems to be confirmed, after the negative impact associated with the implementation of the new Public Contract Code; in the first nine months of this year, calls for tenders for public works showed strong growth (32.9% in value), largely driven by contracts issued by Local Councils and the Railways.
Growth of around 2% in 2018
In the light of this quarterly profile, the estimated growth in construction investments for 2018 is somewhat revised (from 1.5% to 1.9%). Residential construction is expected to expand at a higher rate (around 2.5%), thanks to growth in residential renovation, joined by resumed expansion in the new home sector. A positive trend is also expected for non-residential construction, while the weakness in the civil works sector continues, reflecting the new downturn in Public Administration investment spending.
The recovery will also extends into civil works in the period 2019-2020
The construction scenario in Italy for 2019-2020 is expected to see a gradual strengthening of the recovery in investments. The expected acceleration will be mainly driven by civil works, assuming a resumption in public investments that will especially become apparent in 2020, giving rise to a growth rate for the construction sector close to 2.5%. Estimates take into account the allocations made in the last two Budgets, plus the framework plans formulated in the 2019 Budget for additional resources (about 19 billion for the period 2019-2021) with the aim of reversing the trend towards a reduction of the share of public investments in GDP.
Furthermore, a resumption in the capital spending capacity of local administrations is also assumed; to this end, simplifications in the Procurement Code and infrastructure approval procedures have been announced, as well as the creation of a “task force” designed to support Public Administrations in the implementation of projects.
In the same period, residential construction is also expected to continue expansion, albeit at a more moderate rate than in the two-year period 2017-2018; the latter segment will continue to benefit from the positive contribution of investments in redevelopment, following the further renewal of tax incentives, as well as the resumption of the new housing cycle.
The scenario outlined here, however, seems to be subject to significant risks of mainly negative nature; in particular, a possible intensification of tensions on the sovereign debt markets would have a negative impact on the construction sector, through a tightening of credit conditions.