Initial signs of an upturn towards recovery
ITALY: INVESTMENTS IN BUILDINGS
| BUILDING INDUSTRY | 2015 values € mln |
2013 | 2014 | 2015 | 2016 |
| RESIDENTIAL of which: - new - renovations |
71,591
17,464 54,127 |
-4.4
-18.4 3.1 |
-2.7
-14.6 2.4 |
-0.2
-6.5 2.0 |
1.2
-2.9 2.5 |
| NON-RESIDENTIAL | 34,965 | -10.4 | -7.0 | -2.4 | 2.5 |
| PUBLIC WORKS | 22,176 | -13.9 | -7.7 | -0.5 | 3.5 |
| TOTAL BUILDINGS | 128,732 | -8.0 | -4.8 | -0.9 | 1.9 |
Initial signs of a turnaround
Since the middle of last year, the construction sector seems to have embarked on a path of gradual recovery, interrupting a downward trend underway since 2007 and unprecedented in post-war years in terms of both duration and intensity. Istat data for the last quarter of 2015 highlighted increased investments in buildings amounting to 0.9% in economic terms, a significant upturn over the +0.2% figure posted in the third quarter. The annual average, however, sees investments still marked by a negative sign (-0.9%) but with the rate of contraction is much lower than in recent years.
Going into more detail for individual sectors of activity, it is estimated that residential construction will offset a further downturn in new buildings to a large extent by the good performance of investments in housing renovation, thanks to continuing tax bonuses. The decline in investment in new housing continues to reflect the trend of building permits that in the first half of 2015 again posted a contraction (-10.7%) compared to the previous year, on in part attributable to the impact of new measures to simplify construction activity.
Among other aspects, the fall in public works seems to have bottomed out where, after five consecutive years of significant containment, the benefits of resumed public tenders initiated in 2014 and continued last year were finally felt. In this regard, ANCE monitoring for the first ten months of 2015 indicates positive dynamics of tenders for public works, even in terms of value (10.8% on the corresponding period after the increase of 18.6% in 2014). This performance can be linked with tenders involving higher project sums (over 100 million euros), driven by the tender for work on the Brenner railway tunnel, while sums for small-medium projects fell back again.
Table 1 - Construction investments by sector (var. % on previous quarter)
[total = grey; residential = light green; other = green]
Source: Prometeia analysis of Istat data
Still favourable current market situation indications
While applying all due caution, economic indicators available in early 2016 tend to confirm the start of a new cycle of investments in the sector. The decline seen in January for production in the construction sector can be attributed at least in part to climatic factors and does not seem to affect the underlying trend towards gradual recovery in construction activity. In contrast to other sectors of activity, the index of confidence among companies operating in the construction field posted a strong leap upwards in February, that only slightly fell back in the following month; in particular, expectations are still optimistic as regards business and employment.
Table 2 - Index of production and confidence among construction companies (2010 = 100)
[index of confidence = orange; index of production = light blue]
Source: Prometeia analysis of Istat data
Signs of revival in residential building confirmed
The housing market has consolidated the recovery trend seen as of 2014, especially in the residential sector. In 2015, residential transactions tracked by the Inland Revenue (in terms of the number of formal records) increased by 6.5% over the previous year, accelerating in the second half with the conclusion of the effects of the tax reform that had a negative impact on results in the first months of the year. Signals indicate a resumption of business throughout the country and involve leading provincial cities and smaller centres, with an important role being played by major urban areas.
Signs of stability are also emerging in terms of prices, which in the third quarter 2015, for the first time in four years, posted an albeit modest increase on an adjusted basis. The recovery appears to be supported by the rise in prices of new homes, while there are still signs of setbacks for existing homes. Prospects, nevertheless, remain favourable: the investigation of the Bank of Italy into the housing market for the last quarter 2015 outlines greater optimism over the evolution of the real estate market and, for the first time since 2011, the proportion of agents reporting decreasing sales prices fell below the 50% threshold.
The recovery on the residential market benefited from improved conditions for access to credit, encouraged by the ECB's monetary policy assuring liquidity in the banking system that brought money market interest rates close to zero. Positive dynamics as regards mortgage agreements with families also improved (+70.6% on average in 2015, according to Bank of Italy data), also driven by the strong recovery of alternative loans made particularly attractive by low interest rates and by now representing almost one-third of the lending market.
The non-residential market was much less positive; the resumption in transactions exclusively involved the commercial real estate sector (over and above accessory property), while the fall in transactions continues to affect industrial property and the tertiary sector, confirming the continued existence of excess production capacity that has not yet been completely re-absorbed.
Table 3 - Tenders for public works (bln euros)
Source: Prometeia analysis of Ance data
Consolidation of the recovery driven by public works
The recovery of investments in building and construction is expected to consolidate in 2016, suggesting a growth estimate close to 2% on average for the year, reviewed upwards compared to previous estimates (not the least in light of a higher statistical drag effect).
The turnaround will mainly be driven by the Public Works sector, following measures to re-launch public investments taken by the Government in order to consolidate the economic recovery. In this regard, the Stability Law (budget) for 2016 indicated a return to positive dynamics for public expenditure in assets – where substantial portion concerns buildings – and envisaged the abolition of the internal Stability Pact for local councils. This measure, in particular, would allow well-managed public administrations to use resources so far curbed by cash flow limits, thereby helping to set in motion investment plans that have already been approved.
A significant boost to the resumption of public works is expected through accelerated expenditure of European funds linked to the flexibility clause for investments required by the EU Commission. This may well free up about € 5 billion to be used for national co-financing of European programmes largely such as structural funds, trans-European transport networks and projects financed by the Juncker Plan. The addition of related EU resources suggests a significant multiplication effect on capital expenditure (around 11 billion euros, of which over 3 billions for transport and infrastructure networks).
Other action concerning infrastructures launched by the Government primarily target small-medium works, as emerges from the need to ensure financial stability to a number of important investment programmes, such as the Plan to combat Hydrogeological Risk and various plans involving school buildings. The same objective was behind the release of funds for the long-term investment plan of Anas and the Framework Agreement with RFI (Italian Railways), both focused on a substantial increase in appropriations for maintenance work.
More moderate recovery for housing
Along with investments that can be activated by the public sector, even non-residential sector in 2016 is expected to recuperate a good expansion profile. The launch of a new series of investments in capital assets would help re-activate private non-residential demand, also encouraged by more favourable credit conditions for companies.
Table 4 - Transactions and house prices (indices, 2010 = 100)
[house prices = green; transactions = orange]
Source: Prometeia analysis of Istat and Inland Revenue data
Expectations for growth in the residential field, on the other hand, will more limited (slightly higher than 1% on average over the year), suffering from evolution in the new homes area which is still weak; this will continue to be affected by the need to absorb high levels of unsold property. This would limit stimuli for a resumption of construction activity linked with improvements in families' disposable income and the historically low interest rates, as well as the impact of support measures for the real estate sector. These include, in addition to the elimination of tax on first homes, the 50% deductibility of VAT on new homes in energy classes A and B, property leasing, tax aid on the purchase of real estate for rent with “agreed” fees.
The weakness in new residential building will continue, however, to be offset by positive dynamics as regards investments in housing renewal, in the light of the extension until December 2016 of tax incentives on renovations and energy efficiency for buildings.