Faltering trends in first half of 2016
ITALY: INVESTMENTS IN BUILDINGS (% var. on annual average)
| BUILDING INDUSTRY | 2015 values € mln |
2015 | 2016 | 2017 | 2018 |
| RESIDENTIAL of which: - new - renovations |
72,831
16,459 56,372 |
0.7
-3.4 2.0 |
1.3
-3.0 2.5 |
1.0
-1.0 1.5 |
1.1
-1.3 1.0 |
| NON-RESIDENTIAL | 36,952 | -2.6 | -0.3 | -1.6 | 2.3 |
| PUBLIC WORKS | 23,999 | -0.5 | 0.5 | 2.0 | 3.5 |
| TOTAL BUILDINGS | 133,782 | -0.4 | 0.7 | 1.3 | 1.8 |
Faltering trends in first half of 2016
The way to recovery for building in Italy is proving to be slower and uneven than expected. Signs of a turnaround in the long recessionary trend that emerged in the second half of 2015 have weakened this year; in the first quarter, construction investments suffered another setback (-0.3% over the previous year), affecting the residential market and other sectors of operations, followed by a very slight recovery (+ 0.3%) over the following three months. Despite this setback, investments nonetheless have grown compared to the corresponding period 2015 (1.6% on average in the first half year).
Information available for the most recent period is rather contradictory but tends on the whole to envisage a modest strengthening of the recovery in the second half of 2016. The construction sector production index continued to highlight an irregular trend (-0.4% over the previous month in July, after posting +1.2% in June) close to historic minimums; in the first seven months, the index fell by 0.4% compared to the corresponding period in the previous year. Confirmation of the fragile context in the sector takes the shape of continued decline in employment (-4.9% compared to the previous year in the second quarter of 2016), identifying construction as the only sector still positing negative results as regards employment.
However, more favourable signs seem to be emerging from indicators for future trends. In particular, the confidence index of construction companies in summer reached its highest point since mid-2008 and maintained higher levels than those posted in other sectors of the economy.
Table 1 - Construction investments (var. % on previous quarter)
[total = grey; residential = light green; other = green]
Source: Prometeia analysis of Istat data
Positive indications for housing renovation and, to some extent, non-residential building
In more detail for individual areas, signs of weakness as regards new housing construction, were confirmed and are the outcome of continued falls in building permits extending into 2015 (-12.5% over the previous year). Tax incentives for renovations and energy upgrading of buildings continued to stimulate developments and a still positive investment trend in this sphere.
Data for non-residential buildings go in the opposite direction. On the one hand, the turnaround for permits – up at last in 2015 for the first time after a decade of uninterrupted decline – suggests the possibility of a recovery in construction activities in the near future. On the other hand, positive developments as regards credit seem to be moving backwards; loans to companies for investments began falling in the first quarter of 2016, in the wake of the exceptional increase in the previous year.
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
Public works market “cooling down”
Interrupting the positive developments in the period 2014-2015, tenders for public works in recent months have seen significant downsizing, attributable to the introduction last April of the new code for public contracts. The collapse as regards tenders posted in May (-75% in value, according to ANCE survey) was attenuated over the following months but the results since the start of the year are still negative, with a decrease of almost 15% compared to the corresponding average for January-August in the previous year. The uncertainty stirred up by the new regulatory framework – and the main innovations it contains (ban on integrated tender contracts, qualification of contractors presenting tenders) – has especially put a brake on local authority contracts, starting from City Councils which in turn accentuates a downward trend for projects already tendered in the closing months of 2015. The negative effect of the new code on the public works market is nevertheless expected to smooth out gradually over coming months, not the least in view of recent amendments and the completion the decrees implementing the legislation.
Consolidation of the recovery in real estate transactions
Faced by still weak investment and production, the expansion dynamics on the real estate market consolidated with increases in residential sales of 20% higher than the trend in the first two quarters of 2016. Trends on the non-residential market were also very positive, highlighting a broad growth in all segments – particularly in the production and commercial spheres.
There are still certain conditions favouring housing demand, such as improvements in household income, lower interest rates and better credit access. In this regard, there mortgages are also becoming easier, reflecting lower risks on the housing market and greater competition among banks to win over low-risk customers. Total loans still include subrogation and the restructuring of existing mortgages (about 20% in the first half of 2016), albeit down compared to the previous year.
Table 3 - House sales and prices
[house prices = green; transactions = orange]
Source: Prometeia analysis of Inland Revenue and Bank of Italy data
Table 4 - Tenders for public works
Source: Prometeia analysis of Ance data
Downward revision of growth for 2016
The weak performance in first half suggests that this year will see a more moderate growth in construction than expected in recent months; new forecasts suggest an increase in investments of 0.7%, down from the previous 1.5% figure. The most significant downward review concerns the public works, given the more limited impact of the measures to relaunch public investments implemented by the Government. In the light of the most recent estimates, capital expenditure by Public Administrations – a substantial part of which concerns buildings – seems set to receive lower increases than announced last April. In addition, there have been delays in implementing the European flexibility clause for public investments (amounting to 2.5% of GDP), resulting in slower acceleration of national expenditure for investment projects co-funded by the EU.
In line with weak demand for capital goods on the part of companies, estimates in the non-residential sector have also been reviewed downwards, which is expected to close 2016 with only a slight increase over the previous year. Residential construction continues to see a good rate of expansion (above average for the construction sector), once again exclusively attributable to the impetus for investments in renovation that are proving capable of offsetting further weakening for new homes.
Improvements are likely
The two-year period 2017-2018 should see a progressively stronger recovery in the national building sector, with growth rates in the order of 1.5% on average per annum. The acceleration will probably be driven by non-residential construction, thanks to more favourable conditions for business investments, and public works on the assumption that – after overcoming the braking effect caused by the new code – there will be a resumption of activities by contractors and, especially, encouragement for public investments by fiscal policy.
In this regard, the new forecasts for gross fixed public administration investments indicate over the next few years an acceleration of capital expenditure, not the least thanks to unlocking local authority budget surpluses for investments in small and medium-sized projects, such as those involving public property and school buildings. The period covered by the forecast should also see the first effects of action (infrastructures, environmental projects and land safety) scheduled as part of the “Southern Italy development pacts” signed between the Government and the Regions. This will be joined by investments to be carried out within the framework of the ANAS business plan for the period 2016-2020 and others covered by agreement with RFI (Rete Ferroviaria Italiana-Italian Railway Network).
A significant impulse for construction is also expected from measures that will be included in the next budget law. Measures being developed include an extension of incentives for renovation and energy re-qualification of buildings (with possible inclusion of condominiums), the allocation of resources for reconstruction in areas affected by the recent earthquake and, especially, the national seismic prevention plan. This plan will necessarily be based on a multi-year time schedule but, in the first instance, is expected to include more incentives for anti-seismic works.
In relation to the measures announced, investments in building renovation will maintain a favourable trend for the entire period covered by these forecasts, whereas new residential construction is likely to see a slow recovery from the recession, whereby investments will only begin to move upwards again in 2018. The resumption of the latter sector, despite improvements in household income and still favourable credit conditions, will continue to be hampered by the need to deal with high levels of unsold housing.