We think that prolonged weakness in domestic and foreign spending on prime high streets in Italy will add to pressure on rental affordability, triggering rental falls this year. However, a less significant increase in online penetration during the pandemic supports our view that rents will return to growth further ahead.
- We think that prolonged weakness in domestic and foreign spending on prime high streets in Italy will add to pressure on rental affordability, triggering rental falls this year. However, a less significant increase in online penetration during the pandemic supports our view that rents will return to growth further ahead.
- In 2020, prime high street rents in the Italian markets held broadly steady, in contrast to a fall at the euro-zone level of 9% y/y. The stability of rents was surprising given that retail sales were weaker than the euro-zone average, although prime retail rents in Italy have historically been sticky downwards. However, we think that 2021 will mark their first fall in almost three decades.
- There are already signs that retailers are under pressure. Agents report that the use of incentives increased sharply last year. And prime retail rents in real terms are above trend, particularly in Milan. (See Chart 1.) In the weak economic environment, this can provide an indication that the ability of tenants to pay rents is more limited. And since spending on prime high streets is expected to only improve slowly, even as the vaccine rollout gets underway, we think that rental affordability will become more of a concern.
- Indeed, the sharp hit to household incomes last year means that we now expect household spending in Italy to recover more slowly than previously forecast, remaining below its pre-virus levels until the end of 2022. (See our European Economic Outlook.) And the return of foreign tourist spending, which has also been a key support to prime high streets in Italy, is likely to be slower given delays to vaccine rollouts and tighter travel restrictions because of the risks from new COVID-19 variants.
- However, we remain optimistic on the prospects for Italian retail further ahead. Indeed, history suggests that foreign tourism will not be permanently damaged by the pandemic. Further, once the vaccine rollout allows the lifting of virus restrictions, office workers will return to city centres. Even though some of the pandemic-driven increase in remote working is likely to become permanent, this will still give a significant boost to footfall in Milan, which has one of the largest commuter populations in Europe.
- Admittedly, there is a risk that a greater shift online in the luxury retail sector results in a further consolidation of store portfolios. Bain estimate the online share of personal luxury retail rose to 23% in 2020, from 12% in 2019. But there are early indications that Italy might not be as susceptible to a post-virus acceleration in online spending, which should support domestic spending in stores. Indeed, online penetration increased by much less last year than in Portugal and Spain, where online shares have also tended to be lower by euro-zone standards. (See Chart 2.) As such, after an expected fall of 3% y/y this year, we have pencilled in prime retail rental growth of 1.7% p.a. in the Italian markets over 2022-25.
Chart 1: Italy Real Retail Rents and Trend
Chart 2: Retail E-commerce Turnover (% Total)
Sources: Refinitiv, Capital Economics
Amy Wood, Property Economist, email@example.com