Prospects for gradual consolidation of the recovery 2019-2020
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 |
1.6
0.9 1.8 |
1.3
1.6 1.2 |
1.3
2.1 1.0 |
| NON-RESIDENTIAL | 39,628 | 1.2 | 1.7 | 1.9 | 1.9 |
| PUBLIC WORKS | 22,041 | -1.3 | 0.5 | 2.3 | 2.7 |
| TOTAL BUILDINGS | 137,826 | 1.5 | 1.5 | 1.7 | 1.7 |
* net of property ownership transfer costs
The construction recovery continues at a moderate pace
The second quarter of 2018 saw overall investments in construction fields post economic growth of 0.3%, in residential and other sectors alike. This is a slight acceleration compared to the first three months of the year but rates are distinctly low compared to those seen in the second half of 2017. Compared with the corresponding period, investment growth was 1.9% on average for the first half-year.
The market situation indications available for the second half-year are contrasting and confirm the uneven nature of the current recovery. The construction production index, after the rebound in June, saw a downturn in July; the average for the May-July quarter saw an increase of 1.7% compared to the previous three months.
Table 1 - Construction investments by sector (% variation over previous quarter)
[total = dark blue; residential = blue; other = light blue]
Source: Prometeia analysis of Istat data
The signals provided by the climate of confidence among companies in the sector are more favourable and although slightly lower in September, they remain around the highest values since the second quarter of 2007 - levels which are much higher than those seen in other sectors of the economy.
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 particular, residential building still highlights positive indications as regards building renovation and energy redevelopment projects, suggesting a positive trend for investments in the sector driven by the tax incentives extended until December 2018. The signs of a reversal in the trend for new residential buildings are also confirmed, given the upturn in building permits the sector in 2017 (+11.2%), albeit starting from historically low levels.
The resumption of permits also characterized the non-residential sector (+29.3%).
All sectors of the property market confirmed an expansion dynamics
House sales in the first half of 2018 posted 5% growth compared to the previous year, continuing - albeit at a more moderate rate - the recovery first seen in 2014. This trend was shared by all the main cities, with the exception of Rome, were a negative performance was recorded.
Table 3 - Permits for residential buildings (thousands, cumulative over 4 quarters)
Source: Prometeia analysis of Istat data
The tertiary-commercial segment also continued its positive trend, with a 7.2% increase in transactions. Growth in production areas (warehouses and industrial buildings) was more contained (4.8%), effectively slowing down.
Although property deals have grown for many quarters, the fall in house prices has not yet stabilized (trend of -0.4% in the first quarter of 2018), affected by further downturn for the existing housing market, while signs of an inversion in trends began to appear for the new property segment.
The recovery on the property market, still low house prices and low interest rates continue to encourage demand for mortgages to purchase homes. The negative trend for loans (-7.9% in the first quarter) is therefore exclusively attributable to the downsizing of subrogations, thereby - after considerable recourse to re-financing loans in the past - reducing the potential for people for whom these operations are still convenient.
The public works sector is still weak
Measures aimed to revive public investments launched in recent years are still struggling to materialize in effective form. The trend in fixed gross investment expenditure by Public Administrations in the first quarter 2018 indicates a further decline (-3.1%), after the downturn already seen in 2017, compared to expectations of nominal growth close to 2.5% for 2018 as a whole.
Table 4 - Permits for not residential buildings (thousands of m2, cumulative for 4 quarters)
Source: Prometeia analysis of Istat data
Indicators as regards prospects seem to be more favourable; in particular, calls for tenders for public works posted strong growth (45.2% in value) in the first seven months of 2018, confirming the expansionary trend that began in 2017 after the negative impact linked with the implementation of the new Public Contract Code.
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 recovery involved almost all contracting stations, although tenders issued by Local Councils and the Railways were the main driving forces.
Slight upward review of growth estimates for 2018
The gradually-improving quarterly profile, after the setback in the first months of the year, prompts a slight review of growth in construction investments estimated for the current year from 1.3% to 1.5%. Residential construction is expected to grow at a slightly higher rate, again driven by housing redevelopment projects, by now joined by positive dynamics for new homes. The trend for building permits suggests that the non-residential sector may also be a driving force behind construction in 2018, in line with the cycle of investments in capital assets by companies.
We confirm a conservative estimate for civil works that in the short term are not expected to show any particular signs of recovery. The onset of cost-benefit analysis for major works decided by the new government, in fact, will postpone the implementation of infrastructure projects, including the progress of works already underway. Delays are also affected by legislative obstacles as regards planning the so-called “Investment Fund”, set up by 2017 Budget and refinanced by the 2018 Budget, viewed as the main vehicle for bringing available resources for infrastructure investments together (overall, more 80 billion euros over 15 years).
Consolidation of the recovery in 2019-2020
The recovery in construction investments is expected to consolidate over the next two years at a slightly more sustained rate (1.7% on average per year). This scenario is based on the hypothesis of an effective redistribution of public investments capable of ensuring new impetus for civil works, starting from resources allocated over the last two years so far blocked, among other factors, by the loss of design skills by local administrations and the introduction of the Tender Procurement Code. The initial information currently available as regards the government's economic policy, illustrated in the Update to DEF 2018, indicates a resumption of investments through increased financial resources, improvements to the technical skills of central and local administrations, as well as changes to the Tender Procurement Code.
Table 6 - Gross fixed investments by Public Administrations (% variation compared to previous quarter)
Source: Prometeia analysis of Istat data
In the same period, residential construction is expected to continue moderate expansion, sustained by the favourable performance of household incomes and historically low levels for interest rates notwithstanding the gradual increase from the end of 2019. In a context of gradual reduction of unsold housing stock, the recovery in investments in new homes should be strengthened; positive intonation is still expected for the redevelopment sector, based on the extension of the tax incentives.