On Sunday, (4 December, 2016), the Italian electorate overwhelmingly rejected the government’s proposals for constitutional reform and Prime Minister Matteo Renzi promptly announced his resignation as a result.

The reform was aimed at reducing the size and influence of the upper house of the Italian parliament and it was one of a number of steps aimed at making Italy easier to govern. Unfortunately for Renzi, the referendum turned in to a chance to register dissatisfaction with the government and Renzi’s promise to resign if he lost only served to encourage the protest vote.

The “no” vote ushers in a period of political gridlock in Italy but this is not exactly a new phenomenon. On average, Italy has had one government each year since the republic came in to being in 1946. What will happen now is that the President of Italy, after some deliberation, will push for the formation of a transitional government to fill the gap until the next General Election is held in spring 2018. There is a chance that this will see Renzi return to office or, if not Renzi, another like-minded technocrat.

The markets are worried about an early General Election that might put the anti-establishment Eurosceptic Five Star Movement (5SM) in a position to form a government.

This is unlikely to happen. An early election is doubtful and, even when one does occur, the lack of constitutional reform could actually make it harder for the 5SM to form a government. It is also worth noting that although definitely anti-establishment, the 5SM is not quite so EU-sceptic or euro-currency sceptic as many foreign newspapers report.

A “yes” vote could have increased the attractiveness of Italian real estate to investors. The “no” vote leaves the old uncertainties in place and layers a few more on top.

Despite the uncertainty, CBRE still expects reasonably robust investment levels in Italian real estate over the coming year for a number of reasons:

  • Domestic investors, such as private investors or pension funds, have a “home-bias” towards Italian property. Increased political uncertainty outside of Italy has actually led some Italian institutions to re-think their strategy of diversifying away from Italy and towards more balanced European core investments
  • Some real estate investment funds are approaching maturity and they will be successfully marketed regardless of the political uncertainty
  • Milan accounts for almost 40% of investment and it is generally seen to have strong economic prospects and to be partially insulated from wider Italian uncertainties.
  • Prime retail is also seen as being resilient. It is more dependent on tourist spending and internal demand for the quality retail offer and is less likely to be affected by any fallout from the referendum

In the short-term some yields could move out and there may be some opportunistic buying possibilities, although the level of yields is unlikely to be affected longer-term. The big negative impact short-term is likely to be on the ability of banks’ to dispose of some of their NPLs. The various attempts to re-capitalize the banks all include some element of NPL sale and this will now be harder to do in the post-referendum climate. Continued worries over the solvency of Italian banks, particularly Monte dei Paschi di Siena, rather than political instability, will actually be the dominant concern over the coming months. 

We continue to believe that the banks will muddle through and that private sector attempts at re-capitalisation will continue. Discussions with the European commission on how the government can assist Monte dei Paschi di Siena without breaking European bail out rules will continue.

Further information can be found in the CBRE ViewPoint “The Property Market Implications of the Italian Constitutional Referendum”.