SaMoTer Outlook - Construction industry report
(June 2016)

The Italian economy confirms growth…

The Italian economy continued its moderate recovery in the first quarter of 2016, driven by growing domestic demand, while the export share was penalised by difficulties on markets outside the EU.
The expansion phase is expected to continue in coming quarters, albeit at a more moderate pace reflecting the climate of heightened uncertainty linked with a complicated external context.

 

…against a still fragile and uneven resumption in construction

Construction investments, after two consecutive quarters of expansion, posted a slight contraction during the first quarter of 2016. This is a temporary setback that is not expected to change the path towards a gradual end of the building crisis that began in the second half of last year. In detail, the sector confirmed its role in driving investments in renovations and energy upgrades, thereby offsetting the continued weakness in the new housing area still suffering from shrinking permits to build. The non-residential sector was the first to show cautious signs of a turnaround, as regards permits and transactions alike.

The property market confirmed its favourable period characterised in early 2016 by a marked acceleration in sales driven by the improvement of family financial situations and low interest rates in a context of substantially stable house prices. As regards public works, fewer tenders have been announced in recent months (number and amount), largely attributable to the uncertainties associated with the application of the new procurement code; it is likely that this poor situation will continue for a few more months.

 

Public investments confirm their role as a driving force…

The new building cycle is expected to consolidate in 2016-2017, with investment growth rates of just below 2% on average per annum. The main contribution to the recovery is expected from the civil engineering sector, thanks to fiscal policy implementing significant measures to relaunch public investment. Significant impetus is expected from the elimination of the internal Stability Pact, which would allow local authorities to accelerate investments blocked until now as well as infrastructure projects co-financed by the European Union, even within the scope of the so-called Juncker Plan.

Other forms of expansion are also expected from the release of funds for the ANAS Long-Term Investment Plan (roads) and the Planning Agreement with RFI (railways), not to mention – as regards medium-sized projects – the progressive implementation of hydro-geological risk prevention and school building programmes.

Starting in 2016, even the non-residential building sector will resume positive trends thanks to a new cycle of business investments.

 

…the residential sector will see a moderate recovery

A more moderate expansion profile (of around 1% on average per annum) is expected for residential building; this sector will benefit from the improved economic status of families and more favourable credit conditions but, at the same time, will continue to be hindered by the need to clear unsold housing stock which will prolong the contraction in new home-building even in 2016.

Investments in re-qualification and renovation will continue to grow, albeit at more moderate rates in 2017, assuming that tax incentives stabilise, but on less favourable terms than those in force until the end of December.

 

Slow and uneven recovery from the long recession

The weak economic situation early in 2016 probably will not change the recovery process that began in 2015. There are still positive indications in terms of business confidence.

 

Table 1 - Construction investments (var. % on previous quarter)

[residential = green; other = orange]

 

Source: Prometeia analysis of Istat data

 

Table 2 - Index of confidence among construction companies (2010 index = 100)

[average - January 2000/May 2016]

Source: Prometeia analysis of Istat data

 

PROPERTY

Signals of improvement on the property market

Table 3 - Property market in Italy

[residential transactions = green; house prices (new and secondhand) = blu; loans to families = orange]

Source: Prometeia analysis of Inland Revenue and Bank of Italy data

 

RESIDENTIAL

Renovation continues to push the sector as the fall in new buildings bottoms out

The downturn in the number of building permits is beginning to stabilise at historically low levels, while families are more willing to undertake renovation projects (even after the end of incentive policies) thereby continuing to support restructuring investments.

 

Table 4 - Housing building permits (in thousands, cumulative for 4 quarters)

Source: Prometeia analysis of Istat data

 

Table 5 - Spending intentions for special maintenance (% positive responses)

Source: Prometeia analysis of Istat data

 

NON-RESIDENTIAL

Initial, prudent signs of a turnaround

The downturn in the number of building permits is bottoming out, giving way to the first signs of a recovery; general improvement in transactions in early 2016.

 

Table 6 - Non-residential building permits (in thousands of square meters, cumulative for 4 quarters)

Source: Prometeia analysis of Istat data

 

Table 7 - Non-residential property transactions (% var. on corresponding quarter)

[manufacturing sector = green; commercial sector = orange; service sector = light blue]

Source: Prometeia analysis of Inland Revenue data

 

PUBLIC WORKS

The resumption in procurement tenders continued in 2015, although there were signals of uncertainty earl this year

The positive trend in tenders for public works continue din 2015, driven by projects for sums in excess of € 100 million and, in part, others for lower sums (less than € 1 million).
Initial data for 2016 suggests a downturn (-35.4% in value) attributable, at least in part, to a statistical effect.
It cannot be excluded that the weakness on this market may persist for a few more months, not the least in relation to the climate of uncertainty associated with the new tender procurement code.

 

Table 8 - Tenders for public works (€ billions)

Source: Prometeia analysis of Ance data

 

The main measures for re-launching investments

• Abolition of the Internal Stability Pact
  incentives for capital expenditure by local authorities blocked until now by spending limits (estimated resources of € 4 billions)
• EU flexibility clause
  deficit calculations now exclude national funding of projects co-financed by the EU (for € 5.2 billions). Programmes involving transport and infrastructure networks to be speeded up
• «Juncker Plan»
  finance for 8 infrastructure and innovation investment projects, totalling € 1.4 billion in resources stimulating overall investments of € 4.8 billion
• RFI and ANAS investment plans
  € 17 billion in additional resources for investment in the railway network; ANAS business plan 2016-2020 (€ 20 billion of public funds
• Hydro-geological instability prevention plan
  sites totalling € 1.3 billions set in motion again, Special Plan for metropolitan areas (€ 1.3 billion) and the National Plan 2015-2020 (€ 7 billions)
• School building programmes
  € 3.9 billions made available for safety, renovation and new construction projects

 

ITALIAN SCENARIO

New expansion cycle driven by the resumption in public works, more moderate recovery in the residential sector

The recovery trend is expected to consolidate in the period 2016-2017, driven by civil engineering and, to some extent, by non-residential construction.

There was lower growth in residential investment growth given the continuing weak trend for new homes, while more positive input came from re-qualification, although this may fall somewhat in 2017 if related incentives are abolished.

 

Table 9 - The construction scenario in Italy

[GDP = green; constructions = orange]

Source: Prometeia, Analysis of Industrial Sectors

 

ITALY: INVESTMENTS IN BUILDINGS (% var. on annual average)

BUILDING INDUSTRY	2015 values € mln	2013	2014	2015	2016	2017
RESIDENTIAL of which: - new - renovations	76,293   18,611 57,682	-4.4   -18.4 3.1	-2.7   -14.6 2.4	-0.2   -6.5 2.0	1.2   -2.8 2.5	0.6   -0.4 0.7
NON-RESIDENTIAL	36,353	-10.4	-7.0	-2.4	2.1	3.0
PUBLIC WORKS	23,056	-13.9	-7.7	-0.5	2.7	4.2
TOTAL BUILDINGS	135,702	-7.3	-4.8	-0.9	1.6	1.9