International Articles: Italian Property Funds: Opportunities for Investors

Abstract The Italian property investment market is in its infancy. The IPD Italian index only has five years of data and the transparency of the market, although improving rapidly, has historically been poor. In the last ten years, the Italian market has seen an explosion in property funds. The Italian property investment market was initially limited due to prescriptive and inflexible laws, but there was a substantial change in 2003/2004, when the Italian Government introduced new laws to facilitate property investment. As a result, property fund returns have been strong and positive, particularly in comparison to stocks and shares. This paper reviews the current situation in Italy and comments upon the opportunities, and problems, for real estate investors in Italy. Italian property funds are similar to property funds in other countries. As with all funds, the asset allocation decisions tend toward low risk properties, such as offices and retail investments within a prominent domestic (national) investment strategy. However, property funds in Italy are relatively new and not only are the existing funds maturing and establishing themselves, but new funds are constantly coming onto the market. They have been extremely successful and in the short period since their introduction in Italy, the property funds have experienced continual positive returns with low volatility. Conversely, over the same period, the Italian equity market has performed poorly with relatively lower and more volatile returns. As a result, indirect property investment is a growth market, with a substantial amount of new products planned once the market matures. However, one stumbling block is that the speed of the creation of new funds also creates a perceived and real product illiquidity as no secondary market has yet been established. Another problem is the excessive discount between the market value of the shares and the net asset value of the underlying portfolio. While this is a universal phenomenon with property companies worldwide, the discount in Italy appears to be excessive in comparison to most markets. Italian property funds allow investors to gain access to the investment characteristics of property without necessitating the substantial capital outlay required in direct property investment. The investors also avoid direct taxation and direct involvement in the expensive and time-consuming management of the buildings. Thus the investor, who cannot (or chooses not to) hold direct investments in property, can participate to the trend of a fund that invests mainly (or only) in properties. Property funds enable indivisible direct property investments to be converted into a divisible financial vehicle that can be sold in parts: it is a sort of ''paper buildings.'' The investors, through the acquisition of the shares in the fund, can indirectly invest in property investments that, otherwise, would be too expensive due to their lot size. At the time of writing, Italy has not yet introduced Real Estate Investment Trusts (REITs), although the Italian Government has now put the relevant laws into place to allow for their introduction in 2008, with the name of Siiq (Societa' di investimento immobiliare quotata-Listed Property Investment Company). The first Italian property fund was introduced in 1999, but the growth since then has been rapid and at the end of December 2006 there were 78 property funds in Italy run by 24 different management companies (Sgr1). The overall investment value is [euro]C15.58 million. Property Market in Italy The Italian property market, compared to other European markets, is not well established. It is dominated by the two major cities of Rome and Milan and, within those cities, the principal property investments available are offices and retail. This makes diversification difficult at both a national and a sector level. Other regions and sectors are available, but are generally outside the two main centers and often in single units, with no established secondary market, which creates a liquidity issue. …