SaMoTer Outlook - Construction industry report
(September 2015)

ITALY: CONSTRUCTION INVESTMENTS

BUILDING INDUSTRY	2015 values (€ mln)	2013	2014	2015	2016
RESIDENTIAL of which: - new - renovations	74,115   17,788 56,327	-7.5   -24.4 2.6	-5.2   -18.5 1.5	1.5   -12.0 1.8	0.1   -1.5 0.5
NON-RESIDENTIAL	39,466	-7.2	-5.0	-2.5	2.0
PUBLIC WORKS	25,233	-8.0	-6.0	-1.5	4.0
TOTAL BUILDINGS	138,814	-7.1	-4.7	-1.8	1.3

 

Contrasting market situation indicators

The alternation of contrasting economic signals confirms the difficulties involved in emerging from the recession for over eight years has deeply affected the construction industry. The improvement in investments seen in the first quarter 2015 proved to be temporary, presumably because of special factors such as the acceleration of work in order to complete Expo-related projects. For three months thereafter, Istat reported a new decline in construction investments (-0.8% compared to the first quarter), with similar results for residential and non-residential construction and public works. As a trend, this downturn was more marked (-1.9%), bringing about for 2015 as a whole (assuming zero growth in the second half) a negative result of -1.4%.

Similarly, data for production activities in the construction sector provide evidence of still uncertain trends: the production index posted two consecutive setbacks in May and June, followed by a moderate cyclical upturn (0.3%) in July; on average over the first seven months, the decline in the index came to 2.3% compared to the corresponding period in 2014.

However, more favourable indications seem to be emerging from qualitative surveys. Since the beginning of 2015, albeit with an irregular trend, the climate of business confidence in the sector continued to strengthen, driven by improved assessments for orders and construction plans, both recent and in prospect for the future. Employment expectations also improved, confirming the halt in the trend towards reducing the number of employees; in the second quarter, construction workers saw the first increase since the end of 2010 (2.3%, equal to 34.000 extra jobs compared to the same period in 2014). Nevertheless, the impact of the crisis on employment levels is still dramatic: since the end of 2008, over 520,000 jobs have been lost.

 

Table 1 - GDP and construction investment (index 2007 = 100)

[GDP = orange; construction investment = green]

Source: Prometeia analysis of Istat data

 

Adjustment of new residential production not set to stop…

Going into more detail for individual operating sectors, there are still signs of weakness as regards new housing, the area most affected by the crisis through a drop in investments close to 70% compared to pre-crisis highs.

The continued downward spiral in this field reflects the trend for building permits, with further significant setbacks during 2014, albeit less intense than in previous years (-12%, against -35% in 2013). In particular, permits plummeted to absolute minimum levels in terms of historical comparison never before posted in the post-war period (47 thousand home units, compared with nearly 280,000 at the peak of 2005).

 

Table 2 - Construction investments by sector (var. % on previous quarter)

[total = grey; residential = light green; other = green]

Source: Prometeia analysis of Istat data

 

The decline in residential construction is offset by positive input from investments in housing renovation, by now representing about 75% of the overall residential market. Surveys into consumer confidence indicate that families are still willing to spend on home maintenance, probably encouraged by tax bonuses (restructuring and energy efficiency) renewed again through to the end of 2015.

 

…while public tends get going again

The public works sector suggests an attenuation as regards falling investments. This field, which has suffered intensely in recent years from the effects of fiscal consolidation policies, can benefit from the recovery on the public tender market that begun in 2014 and continued until the early months of this year. Analysis by ANCE for January-May 2015, in fact, indicate a positive trend in tenders for public works, even in terms of value (23% over the corresponding period, after an increase of 19% in 2014). The factors underlying the recovery in public works include measures to ease the internal Stability Pact for investments by local authorities and the acceleration in the use of European structural funds, given the expiry of the 2007-2013 cycle.

 

Slower housing market (on a temporary basis) with prices still down

The housing market is also characterised by ups and downs. According to Inland Revenue data, the variation in transactions (in terms of the number of formalised transactions) was negative again in the first quarter of this year, interrupting the otherwise modest recovery posted during 2014. The downturn affected all property sectors: residential (-3%), non-residential for production (-7.1%), commerce (-5.2%) and services (-6.4%). The new downturn on the market, however, must be interpreted in the light of the ratification, as the beginning of last year, of the new and more favourable registration tax regime (mortgage and property census) which prompted a sharp rise in the volume of transactions in the first quarter 2014 and a consequent negative base effect in comparisons with the same quarter 2015. After harmonising this “out of the ordinary” effect, transactions involving homes maintained a positive trend (0.8%), albeit decelerating compared to the second half of 2014. Even in the event of a resumption in sales after the setback at the start of the year, the residential market is expected to stabilise on sales volumes of just over 400,000 units/year, historically very low and less than half the peak value posted in 2006.

 

Table 3 - 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

 

2014 saw continued falls in house prices, although at less intense rates (-4.4%, up from -5.7% in 2013). The trend was not reversed at the beginning of this year: Istat's preliminary estimates indicate for the first quarter a fall in prices of 0.7% over the previous quarter, which brings the decline accumulated since 2010 to -14%. The downward pressure on prices, especially evident as regards the non-new market, is now also extending more intensely into the field of new homes. The adjustment seems unlikely to bottom out in the short term, as suggested by the Bank of Italy survey of the housing market which highlights that price falls will increase in the third quarter, while medium-term expectations remain moderately positive.

 

Table 4 - Transactions and house prices (indices, 2010 = 100)

[house prices = green; transactions = orange]

Source: Prometeia analysis of Istat and Inland Revenue data

 

Credit recovery confirmed

Signals of a resumption seem to be more widespread as regards credit, although all due prudence and caution is necessary. Mortgages made to families have shown a substantial recovery, both during 2014 and earlier this year (+35% trend in the first quarter, according to Bank of Italy data), which has also stimulated growth for alternative lending that has become particularly appealing thanks to interest rates on new operations at historic lows. A smaller increase was seen for mortgages, attributable to new transaction contracts.

The resumption of loan flows is also thanks to more favourable credit access conditions. The results of the Bank Lending Survey indicate as of the fourth quarter 2014 less strict criteria for home purchase loans, encouraged by the ECB's monetary policy assuring liquidity in the banking system and money market interest rates close to zero. This trend seems to have consolidated during 2015, thanks also to the efforts of the home assurance fund.

 

Towards a slow recovery from 2016 driven by public works

According to available economic information, we feel that the construction field should attenuate in the second half, thereby closing 2015 with investments down by an estimated 2 percentage points on average. The performance as regards residential building may be more subdued, thanks to the impact of renovation and redevelopment.

 

Table 5 - Tenders for public works (bln euros)

Source: Prometeia analysis of Ance data

 

The conditions for the onset of a stage of gradual recovery are expected to materialize as of 2016, with the return to moderately positive investment dynamics at a rate of just over 1%. This evolution is mainly the result to the resumption in public works, driven by Government measures to revive public investment measures. Such measures include the Stability Law 2015 (budget) with a return to positive dynamics for public expenditure in assets for the period 2015-17 while the so-called “Sblocca Italia” Decree envisaged the allocation of resources designed to ensure continuity of sites already underway and infrastructural projects that can be set in motion quickly.

Other action in the construction field proposed by the Government concerns works to combat hydrogeological risk and the School Building Plan for renovation, energy efficiency and construction of new school buildings.

The resumption in investments in public works should also be encouraged by economic policy measures implemented by the EU Commission, starting from the Investment Plan for Europe (the so-called Juncker Plan) which, when fully operative, should provide new funds to finance infrastructure projects. The Prometeia scenario outlines a prudent plan, in terms of effective investments and implementation times alike, assuming a more modest multiplication effect on private investment than the one suggested by EU authorities. Nevertheless, it is believed that action can be taken in this area should pursue expansion effects on investments in buildings as early as 2016-2017.

 

There are still constraints on growth in the residential field

Non-residential investment is expected to recover a profile of good expansion as of 2016; the launch of a new series of investments in capital assets would help re-activate private non-residential demand, also encouraged by the progressive harmonisation of credit conditions for companies. The recovery in residential building is, however, expected to start with some delay compared to other building sectors. The intensity of recovery in this area will be affected by the ongoing weakness of the new home sector which will continue to be negative throughout 2016, given the need to absorb the still high stock of unsold homes (200 thousand units, according to Bank of Italy estimates, with only a slight drop since the peak in 2012). This would consequently impact the otherwise positive impulses from improved income available to families and more favourable credit access conditions, as well as measures to support the sector (including possible reduction on home taxes). The main driving force in the residential sector, therefore, will probably be continued investment in home maintenance, although the stimulus provided by tax incentives might fade away by next year, if incentive measures are not confirmed at current conditions.