The construction cycle in Italy will maintain a moderate pace in 2018, that will be strengthened over the following two years
ITALY: INVESTMENTS IN BUILDINGS
| BUILDING INDUSTRY | 2017 values € mln |
2017 | 2018 | 2019 | 2020 |
| RESIDENTIAL of which: - new * - renovations * |
76,157
15,501 50,255 |
2.2
-0.8 1.5 |
1.3
0.7 1.5 |
1.4
1.7 1.3 |
1.5
2.8 1.0 |
| NON-RESIDENTIAL | 39,628 | 1.2 | 1.5 | 1.5 | 1.6 |
| PUBLIC WORKS | 22,041 | -1.3 | 0.9 | 2.0 | 2.3 |
| TOTAL BUILDINGS | 137,826 | 1.5 | 1.3 | 1.5 | 1.6 |
* net of property ownership transfer costs
The recovery in the construction sector is proceeding with an irregular trend
After the substantial increase posted in the second half of 2017, construction investments in the first quarter of 2018 suffered a setback affecting residential and other sectors alike. However, investments continued to increase (1.5%) compared to the corresponding period in 2017.
Available market situation information is contrasting and tends to suggest only a modest strengthening of the recovery in the second quarter. The index of production in construction posted a partial recovery in April (2.5% over the previous month) after weakening in the first quarter partly because of adverse weather conditions. However, signs of a downturn emerge from the climate of confidence among construction companies in May and June, even though the index is still close to the peak values since early 2008, at levels that are still much higher than those seen in the other sectors of the economy.
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
Going into more detail in individual sectors, during 2017 signs of recovery for building permits for new houses (+13.2% for the figure in the first three quarters) were consolidated, which - albeit starting from historically very low levels - seems to suggest that a turnaround will soon be seen in the negative trend in the new residential construction sector. Favourable indications as regards permits also extend to the non-residential sector, with a leap of more than 37% in the trend for new non-residential building areas in the first nine months of 2017, following a further decline in 2016. Furthermore, the positive impetus of fiscal incentives for renovation and energy upgrading of buildings was extended until December 2018 and also suggests continued positive development of investments in the renovation sector.
Building construction continues to be driven by the real estate market
House sales continued the current recovery almost uninterruptedly from 2014, while highlighting a physiological moderation of growth rates (5% on average in 2017), after the strong increases in the previous year. Despite some signs of decline in certain large cities, the positive trend in sales was confirmed in the first quarter of 2018 (4+.3% over the corresponding period). Transactions also continued the expansion trend in the non-residential market, posting significant increases both in the production and the tertiary-commercial segments (in the order of 8% on average for 2017). At the beginning of 2018, the trend remained almost unchanged in the production segment, while there was a slowdown in the tertiary-commercial sector.
Table 3 - Permits for residential buildings (thousands, cumulative over 4 quarters)
Source: Prometeia analysis of Istat data
Despite this favourable trading background, loans to families to purchase homes posted a negative trend in 2017. The overall figure (-3.2%), however, is largely attributable due to the downsizing of the share represented by subrogations and replacements rather than a cooling down for issuing new mortgages. The conditions for access to credit are still accommodating and demand for loans from families remains strong.
The signs of a recovery on the public works market have been confirmed
2018 opened with two-figure growth in calls for tenders for public works (31.2% in value in the first four months according to Ance), confirming that the negative impact on the sector associated with the application of the new Public Contract Code has been absorbed. The recovery involves almost all contracting stations, even including local administrations, starting with Local Councils, that by now seem to have begun benefitting from the concession of greater financial space envisaged in the 2018 Budget. The main contribution to the increase in calls for tenders, however, can be attributed to works tendered by motorway and airport concessionaires, in contrast with the slowdown railway tenders after the very positive performance in 2017.
Table 4 - House sales and prices (2010 index = 100)
[house prices = blue; transactions = light blue]
Source: Prometeia analysis of Istat and Inland Revenue data
Growth in construction still contained in 2018
The difficult start to the year prompted an estimate for a moderate rate of expansion in construction investments during 2018 of slightly over 1% on an annual average. Residential construction will continue to take advantage of housing renovation, in a context still favourable for demand for building renovation and energy requalification, thanks above all to the extension of related tax incentives. It is believed, however, that in the short term the new tax breaks for condominiums, since their implementation is more complex, will have little impact on investments. Mention should also be made, as seen in the trend for building permits in 2017, of the recovery of albeit weak growth in new homes, thereby interrupting the negative trend going back for a decade.
Table 5 - Tenders for public works (amounts in billions/euros)
Source: Prometeia analysis of Ance data
As for other sectors, in light of positive dynamics for building permits and support from demand for capital goods by companies, there are conditions for the recovery by non-residential buildings to be consolidated. In the civil engineering sector, on the other hand, prudent estimates were formulated that reflect uncertainties regarding the economic policy of the new government, following announcements concerning the onset of cost-benefit analysis for the main public works, thereby postponing the effective implementation of infrastructure projects so far planned. In particular, the lengthy reprogramming time affecting funds already allocated may well make vain the contribution of the so-called “Investment Fund”, set up in the 2017 Budget and further refinanced in the 2018 Budget, might otherwise have provided for the revival of public investments already this year.
The recovery in the construction sector is expected to consolidate in 2019-2020
Forecasts for the next two years suggest a scenario of gradual consolidation of the recovery in construction investments at an average annual rate of around 1.5%. This scenario assumes that a cycle of public investments will be launched, thereby ensuring significant impetus for civil engineering works, based on resources set aside by governments starting in 2016 but so far blocked by the new regulatory framework for procurement tenders and delays in the implementation of local government spending programmes. Furthermore, it is expected that tenders published in 2017 and early in 2018 will begin to materialize in effective openings of construction sites, after overcoming the persistent difficulties that previously hindered the onset of work.
Growth in public works is largely the result of investments in the road and railway networks, thanks to the approval of the ANAS 2016-2020 Programme Contract (road sector) and the release of the 2017-2021 RFI Contract (railways). Support for recovery is also expected to come from post-earthquake reconstruction projects in central Italy, with funds of around 8 billion euro intended for public and private building reconstruction and safety tasks. Lastly, the granting of more financial space to Local Councils ought to support a revival in investments by local authorities, especially for school and sports buildings.
In the same period, residential construction is expected to maintain a moderately expansive profile, stimulated by a gradual strengthening of the signs of recovery seen for new homes, positive trends for household income and still favourable credit conditions, alongside gradual reabsorption of unsold housing stock. Investments in home renovation should also confirm positive trends, thanks to the extension of tax concessions to promote the sector and the impact of the so-called «earthquake bonus» - the tax incentive for safety work on property assets in areas at high seismic risk.