SaMoTer Outlook - Construction industry report
(June 2019)

ITALY: INVESTMENTS IN BUILDINGS

BUILDING INDUSTRY	2018 values € mln	2018	2019	2020	2021
RESIDENTIAL of which: - new * - renovations *	77,929   15,781 51,376	3.8   3.6 2.8	3.6   4.2 3.2	1.3   3.0 0.7	1.3   2.7 0.9
NON-RESIDENTIAL	42,345	3.9	3.0	2.7	1.8
PUBLIC WORKS	22,183	-2.3	4.0	4.5	2.5
TOTAL BUILDINGS	142,457	2.6	3.5	2.2	1.7

 

* net of property ownership transfer costs

 

The recovery in construction & building investments strengthened in the early part of 2019

Construction investments were the most dynamic component among overall investments in the first quarter of 2019, with growth of 2.6% over the previous three-month period (and 5.2% compared to the same period 2018). The improvement, which involved residential and other sectors alike, is in part attributable to favourable weather conditions and, consequently, to temporary factors, as confirmed by the most recent economic information. The construction production index, after the strong increase in February, fell back in March and especially in April, to levels lower than the average for the first quarter. Similarly, the climate of confidence among companies operating in the sector deteriorated in June, interrupting the improvement trend seen in previous months. Confidence, however, remains, at higher levels than in other sectors of the economy and close to the highest levels since mid-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 light of these indications, investments in construction are expected to post a partial negative rebound in the second quarter, however without compromising the current recovery phase.

Going into details for individual sectors, residential building still presents positive indications for investments in restructuring, supported by the need to redevelop the housing stock, as well as the advantages associated with ongoing tax incentives, as well as signs of a more intense recovery for new residential buildings. The expansion trend for building permits continued in 2018, both for the residential segment (6.1% on average in the first three quarters) and even more so for the non-residential component (27.4% in the same period).

 

The performance of the real estate market is still positive

In the first quarter of 2019, house sales increased by 8.8%, consolidating the expansion trend underway almost continuously since 2014. A positive trend also characterised the non-residential market, especially in the tertiary-commercial segment (5.9%).

 

Table 3 - Permits for residential buildings (thousands, cumulative over 4 quarters)

Source: Prometeia analysis of Istat data

 

Although transactions have been growing for several quarters, the decline in house prices has not yet fully stabilised, with a still negative variation trend in the first quarter 2019 (-0.8%), in the wake of a further decline in the existing housing segment and an acceleration of the recovery in the new home segment. However, the price framework is differentiated on local area levels, showing signs of revival in some place, especially in the main urban centres.

Credit channels continued to support the dynamism of transactions on the residential market, although in the first quarter 2019 the trend for mortgages provided to households to purchase homes definitely slowed, reflecting the slowdown for new contracts and above all the new contraction for subrogation mortgages, since the number of contracts for which this operation could still be convenient is by now rather low.

 

As for public works, signs of a reversal in the negative trends over recent years are beginning to emerge

There is a resumption in investments by local administrations which are benefitting from the resources allocated by the government in the three-year period 2016-2018 and the granting of broader fiscal space, thanks to the new public finance rules introduced in the 2019 Budget Law. It is also probable that the recovery in demand in the public works market expressed by calls for tenders issued 2017-2018 has begun to have an impact on activity levels in the sector. Data for the first months of 2019 confirm resumed activity by contracting stations, with an increase in tenders equal to 60% in value in the period January-May, driven by the tenders announced by Local Councils and the Railways.

 

Table 4 - Non-residential building permits (thousands of m2, cumulative over 4 quarters)

Source: Prometeia analysis of Istat data

 

Upward review for 2019

The very positive market situation in the first quarter, despite expectations of a partial rebound in the second, prompts a decidedly upwards review for estimated growth in construction investments for 2019 (from 0.7% to 3.5%). The expansion in investments seems to be driven by residential construction, especially for new housing, and the recovery in civil engineering projects, while the non-residential sector is expected to slow down after the strong growth in 2018.

 

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 construction scenario for the two-year period 2020-2021 suggests consolidation of the recovery phase, with an average rate of expansion of around 2% per year

The main impulse behind growth is once again expected to come from civil engineering works, on the assumption that the sector will benefit from the effects of measures to revive public investments introduced in the 2019 Budget Law and other recently launched dispositions, such as the so-called “Unblock Construction Sites” decree.

In detail, higher allocations of resources defined in the Budget Law, not the least through the establishment of two Funds for investment development (one each for central and local administrations), were accompanied action regarding the regulatory framework designed to overcome the critical issues that have so far hindered the opening of the main infrastructure sites. Simplification measures concerning legislation in force in relation to public procurement were introduced, as well as the establishment of a mission structure (Investitalia) entrusted with the coordination of government policies for public and private investments.

In the same period, residential construction is expected to maintain an expansionary profile, albeit at slower rates than for 2018-2019, backed up by improvements in disposable income among families and lower interest rates. The progressive reduction of unsold housing stock will continue to sustain the recovery of investments in new homes. Furthermore, a still positive trend is expected for the renovation sector, although it is likely that it will post a downturn, not the least in the light of the slow implementation envisaged for new incentives for condominiums and the so-called “Earthquake bonus”. A decelerating growth profile is also expected to characterise the non-residential construction field, given the more moderate rate of investments in capital goods.

 

Various risks continue to affect the scenario, with probably negative impacts

In particular, a worse than expected slowdown in the economy or deterioration in the public finance framework could lead to more modest evolution in construction investments than currently envisaged. Another risk factor seems to be linked with the long implementation times for public works, should the measures already approved prove to be insufficient in achieving significant progress in this regard.