One of the worst affected economies of the eurozone crisis, Italy has struggled to get its finances in order in recent years. An area that tends to suffer from country-wide economic crises in particular is investment in property, with money pouring out of the country and projects that had previously been announced struggling for the necessary financing.
However, a clear sign that things are beginning to stabilise in the country is the growing number of investment vehicles that are sprouting up, ready to offer a number of real estate opportunities to investors both inside and outside of Italy. European CEO spoke to Fabio Carlozzo, CEO of Polaris Real Estate, a specialist investment group focused on projects across Italy, about what opportunities there are for investors in the country’s property market.
It has a perfect segregation of assets and liabilities from the fund management company and its activity, as well as from
the investors
Where did Polaris stem from?
Polaris was created by a few institutional investors back in 2004, in order to provide high-quality investment management services with a captive portfolio of €6.5bn of assets under management. The key focus has always been on the long-term view, risk management, market knowledge, innovation and cost effectiveness.
In 2009, Polaris started to apply the same approach to real estate investment, bringing in a team of professionals who had built a solid organisation. This led to splitting captive activities on equities and bonds and opening the services to institutional investors outside the shareholder’s group. Polaris is therefore now focused on real estate and it is an authorised Italian fund management company, regulated by the Bank of Italy and the Italian Market authorities. We are now managing eight Italian real estate funds and are in the course of structuring four more by the second half of the year. These will have a total commitment that is expected to reach €1.9bn by the end of 2014.
What are the main drivers of Polaris’ success?
The most important thing is a cohesive and outstanding management team, with long-term experience in Italian real estate. This, combined with unyielding integrity, transparency and a thorough risk management attitude, is the basis to provide investors with outstanding professional services and market access.
We worked on strong internal development capabilities in order to gain total control of cost, timing and quality of our refurbishment, redevelopment or development projects, which in return gives us comfort on determining exit values and rental values. Our market access gives us visibility on a huge number of opportunities that are arising, particularly with regards to projects in financial difficulties, non-performing assets served by banking debt that need repositioning, or inner-city redevelopment sites, such as former barracks and railway areas.
What do you consider the key qualities for an investment manager?
Trust. Building a trustworthy relationship with investors and all stakeholders is the one fundamental long-term winning strategy. Trust is based on transparency and integrity, and is particularly important in market sectors that have not been transparent in the past. Trust also means, of course, capability to serve the clients’ needs in terms of market access, structuring and professional services in order to extract value from the real estate asset class.
How appealing are Italian real estate funds to international investors?
The Italian real estate fund is a vehicle managed by an authorised Italian fund management company. It has a perfect segregation of assets and liabilities from the fund management company and its activity, as well as from the investors. The governance of the fund can also suit investors’ needs in order to allow them to see the major decisions of the fund management company. Most of all, the fiscal treatment of the fund is particularly attractive for international institutional investors from white-list countries – those with 20 percent tax rates on distributions – but where such distributions might be exempt for other international real estate funds.
Combining such a transparent and tax efficient vehicle with a strong local knowledge of markets, rules and legislation makes an Italian real estate fund the ideal instrument in order to leverage opportunities.
What will drive growth in Italian real estate in the next five years?
The first aspect is that the prolonged softness of the Italian market, combined with the nearby term of several real estate funds, will put on the market several billions – between €6bn and €8bn – of assets in the next few years, and at interesting values. Also, the market is seeing some opportunistic investors making public offerings on publicly traded funds and approaching commercial real estate portfolios. All these investors are looking at local investment managers in order to get the necessary local knowledge.
The residential transaction crisis – due to increasing unemployment and the mortgage credit crunch – caused the halting of several development projects, both in peripheral location as well as in the main development areas of the bigger cities. Traditional operators entered into financial stress, while the lending banks stood still hoping for a market recovery.
Now it’s evident that those projects need to be totally revisited, from inception all the way to the exit strategy. A mix of functions – the capability to produce quality assets at reasonable costs, controlling all the development risks – brings the opportunity to reposition exit prices while maintaining interesting returns. Also, rented residential exit opportunities are arising, as well as the possibility to offer an IPO exit strategy to willing investors in a five to seven year range.
On a more general term, banks have been pressed lately by the Italian and now the European banking authorities to review all their credits in order to clean their balance sheets. It has led to more than €160bn of non-performing loans and special situations that now need to be addressed. Most of the real estate assets underlying those credits need to be managed by expert asset managers in order to extract the remaining values.
Also, a number of urban regeneration projects are taking their first steps in cities like Milan, Rome, and Bologna, on areas such as brownfield sites, city centre barracks, railway sites, and old public residential blocks. A multi-billion euro public programme of sales will foster new investment vehicles, with participation by a public fund of funds, as part of the Italian debt reduction strategy.
How will Polaris leverage these opportunities?
It’s evident from the opportunities described that it is not a market for opportunistic traders. Strong local market knowledge, a deep understanding of real estate fundamentals and state-of-the-art in-house development capabilities are critical to leverage the abundant opportunities of the Italian real estate market.
Polaris is today developing 180,000sq m of selling surface, mainly residential, with another 140,000 already completed in the last three years. Our projects have an energy consumption of less than 29kWh per square metre per year. We have also developed the tallest residential building in Europe with a wholly wooden structure, which brings incredible energetic and seismic performance as well as overall environmental sustainability. At the same time we maintain total control on development costs, time and quality thanks to our rigid development system.
Very few fund management companies in Italy have these in-house capabilities and this has positioned Polaris as a leading player for the most complex asset repositioning projects. Polaris’s tenure was born for institutional long-term investors, where risk management, accountability and predictability are elements of the total long-term sustainability of projects.