Managing a Real Estate investment in Italy

Three different Real Estate investors, three different assets, same story: good business idea idea, in-depth investment analysis, appropriate project but poor management and poor result. Investing in Real Estate in Italy to enjoy the Italian lifestyle is not difficult, but requires strong operational and financial control. Cesare Carbonchi from Milano reports.

A tremendous potential for real estate investments in Italy

Almost everybody in the world would love to spend some time in Italy to be part of the Italian lifestyle. It's not just a matter of food and wine, landscape or arts, it's a different way to spend and live our time. In Italy you may be part of the beauties rather than just look at them. As real estate prices have decreased for the financial crisis, more and more international investors are therefore considering acquiring a real estate in Italy.

The Market: increasing demand from non-ECC visitors

While English, French and German visitors and investors already perfectly know Italy, visitors and investors from non-ECC countries were limited until few years ago. What is happening today and will reasonably increase in the future is the massive incoming from countries as Russia and Asia. Should international travellers, visitors and investors from these countries love the Italian lifestyle as much as English and French people already do, there would be no available place for living in such a small place as Italy is. What would happen to Real Estate prices is easily predictable.

What is attractive and will increase in value

If You are an investor capable to manage a hundreds millions project just focus were everybody should go at least once in his life: Venice, Rome and Tuscany. If You either are not that wealthy or You want something less obvious, then there are a lot of locations that look perfect to both enjoy the Italian lifestyle and ... make money. Let's come now to the financial issues.

What generally does not work

While buying a ready-to-stay apartment or villa is not that difficult, when we talk about real money and large Real Estate investments and / or large RE development projects that's a different story. In my experience international investors are tremendous professional in the planning and acquisition phases as they are terribly poor when coming to the execution and control of the venture in Italy. In all the three cases I have mentioned in the beginning of this article I had to solve problems on behalf of international investors in RE developments that did not go as planned. This might happen anywhere but I would believe that a better control during all phases of the execution might have brought to a better result.

What we can do for International investors

We would love to say that we are able to deliver successful investments but this is not true. We solve the problems that we could not avoid and we do this immediately. And this makes the difference most of the times.

WACC for companies operating in Italy

When calculating WACC for a company operating in the eurozone, most of the parameters are the same regardless of the specific country in which the company operates. However there might be substantial discrepancies due to different financial markets and corporate taxation: we will try to outline some of these aspects relating to companies based and operating in Italy.

Managing 4 main Risks
We will focus our short analysis on four main issues that may influence our calculation of WACC when working on a company whose seat and main activity is located in Italy. The first deals with the Equity Risk Premium (ERP) that we should apply taking into consideration that the Italian equity market has a lower liquidity compared to other equity markets in the eurozone. The second deals with the huge problem of these years: the Country Risk Premium. The third deals with the calculation of the cost of debt in an environment where the bank credit crunch is relevant. The fourth deals with the after tax cost of debt after with limited percentage of tax deduction of interest expenses.

Equity Risk Premium (ERP) and the issue of Lack of Liquidity
Equity Risk Premium (ERP) in WACC may be computed as historical ERP or forward-looking ERP and we can all rely upon well known equity market studies. We apply ERP as an global equity premium, regardless of the country in which the company operates, because its country risk is measured separately with the Country Risk Premium. However when dealing with the equity market in Italy we should consider two main aspects: one, the market is strongly correlated to international equity markets (see the correlation between FTSE Mib 30 and MS World index) which confirms that the ERP is a global concept; two, the Italian Equity market is less liquid then other markets or, more specifically, the number of shares actively negotiated on the Italian equity market is limited compared to the number of shares issued and the number of IPO is poor. The lack of liquidity for Equity instruments in Italy means a higher risk that we either add to the ERP (if we consider this as a global risk) or we add it to the company's Beta (should we consider it as a specific risk). In any case, do not forget it in your WAAC.

Country Risk Premium: CDS vs T Bonds rate n WACC calculation
Country Risk Premium is THE Risk of this age. We are reluctant in using Country Default Spread (CDS) as a proxy of risk in WACC calculations because CDS are computed for a different scope. We are more confident in applying local T Bills rate as a proxy of Risk Free, thus incorporating the CRP spread for Italian T bills. In addition, we generally choose the 7 year duration as our preferred maturity, because the volume of transactions on the market in Italy is high and prices are accurate.

Cost of Debt: spread on commercial loans
The calculation of the cost of debt in an environment where the bank credit crunch is relevant mat also bring some uncertainty in the WACC calculation. The bank spread actually paid by the company in Italy may not be the one we should use, as this might not be applied to further debt needs. We would therefore consider also the cost of additional refinancing, especially if the business needs additional funds. The difference between the two costs may be relevant.

The after tax cost of debt after with limited interest expenses tax deduction
Our last point deals with the Italian taxation of interest expenses. Interest expenses are tax deductible in Italy only for an amount calculated as a percentage of EBITDA. which means that the portion of interest expenses in excess to the limit is not tax deductible. The after tax cost of debt in Italy is therefore calculated with a formula which is quite complex and different from the usual formula that we use in countries where interest expenses are totally tax deductible.
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Is the consumer credit market in Europe attractive?

Various International banks are withdrawing from the consumer credit market in Europe because the consumer credit business drains too much cash and because emerging markets seem to have a higher potential for growth. Based on few simple economic indicators this strategy does not appear that appropriate. Let's see why.

We will try to measure the attractiveness of consumer credit in different markets measuring the potential increase of these markets in value terms in the next years.

We may measure the “consumer credit market penetration rate” as the ratio between the total stock of consumer credit assets and the gross national product in each country. This consumer credit market penetration rate is high in UK, Austria, Greece and Spain (8% to 12%), is over the average in Germany, France and Poland (7% to 8%) and is low in Italy, The Netherlands, Sweden, Belgium (3% to 5%). Since the attitude towards consumption is getting similar across Europe, both in terms of life-style and spending, we may presume that also the countries with a low consumer credit market penetration rate might increase the use of debt spending to a potential 7.5% minimum level within a medium time frame.

If we compute the difference between the actual consumer credit market penetration rate and the 7.5% potential target rate and we apply it to current GNP, we have a first “quick and dirty” measure of the size of the potential market increase. The larger market is located in Italy where 4 points of increase in the consumer credit market penetration rate means about 48 billion euro additional market size. However this is not useful if we do not have an idea about the speed path.

The consumer credit market has a strong growth rate in Spain, Italy, Greece and Poland, is decreasing in the UK and in Poland and is more or less stable in other countries. We do not expect that the strong growth rate will continue as in the past, but if we combine this information with the mentioned penetration rate, we may derive the conclusion that there is a market in which consumer credit growth is consistent and that is Italy.

The acquisition of a company in Italy

The acquisition of a small industrial company in Italy is a smart way to enter the European market. With a M&A deal the acquirer obtains industrial know how, product design competences, well known labels and talented managers used to international trades.
We will bring you the example of a foreign company that has recently concluded a successful acquisition on the Italian market with a small equity investment. The acquirer was assisted as financial advisor by EqS Equity Studio, a corporate finance boutique in Milano, Italy. The main steps of the project were the following.

Together with the people at EqS Equity Studio, the company discussed what characteristics of the target were considered key (the presence of a well known label in their industry, upper quality, good product design, wide international commercial contacts) and what other characteristics had to be avoided (large investments in real estate, redundancies in production facilities, poor product innovation, poor image). From the financial viewpoint the acquiring company set the amount that was willing to invest in equity in the acquisition.

Based on this Mergers and Acquisition “brief” the people at EqS Equity Studio prepared a market survey and identified a list of potential targets, with a short presentation on each of them that was discussed with the management of the acquiring Company.

We then focused on a short list of only seven targets. These targets were approached to investigate if they were interested in starting contacts in order to set up an international partnership, finally resulting in a short list of four potential Targets.

After one months we were ready to start with the real negotiations: we collected all the relevant information needed by the acquiring Company in order to evaluate in depth each of the Targets, both directly from the Targets and from publicly available information sources. We started meetings with the Target's principal shareholders and managers to understand with which Target we could find the best synergies.

The people at the Corporate Finance boutique in Milano counseled the acquiring Company on the appropriate values to be paid for the various Targets based on current condition on the Italian market and on a stand alone situation; possible synergy’s benefits to the acquiring Company were also discussed.

At the end we all agree on one specific Target. EqS Equity Studio of Milan counseled the acquiring Company as to the strategy and tactics for negotiating with the Target's shareholders, analyzing and suggesting the appropriate tax structure for the transaction based on the Italian legislation.

Once that an agreed structure of the deal was defined, we advised the acquiring Company on the most appropriate Transaction's legal structure, on the text of a Letter Of Intent and on the definitive purchase agreement according to Italian Law.

Additional services enabled the acquiring Company to minimize its risks and costs: the Financial Due Diligence helped in identifying the area of risks: the Corporate Finance boutique in Milano prepared a limited review of the Target's financial situation in order to identify cash flow projections for the following twelve months and to assess the main areas with potential financial risks to the acquirer.

The Mergers and Acquisition process required an accounting due diligence. With the Accounting Due Diligence an accounting review of the acquisition was prepared based on international audit principles. Finally a local Deal Financing helped in minimising the financial cost of the acquisition with a limited currency swap to cover from unnecessary FX risks. EqS Equity Studio of Milan prepared a review the various alternatives available to the acquiring Company to finance the acquisition of the Target and assisted the acquiring Company in arranging the financing of this investment.

10 dos and dont's for your Business in Italy

Italy is a medium-high level consumer market with a 60 million people within the Euro currency zone. Most international companies establish a subsidiary or acquire a company in Italy simply because one has to be there. What a mistake: there are great opportunities but you need to understand the Italian business culture and have a “GLOCAL” strategy to grab them. Let's see how to do business in Italy.


We often come along with corporate clients that either are willing to expand their business in Italy or they just want to close it down. Most amazing, the key factors of success (and failure) seem to be always the same. For an effective management in Italy the following are the DOS and DON'TS based on the Italian business culture.

Get to the right size

Most international companies pretend to do business in Italy through a too small entity. You either remain thin or as alternative you have to get big enough. The “thin” way of your management in Italy is with no structure at all and you use a local dealer or a local business partner. The alternative is to establish an appropriate vehicle, getting fast to a size that represents a critical mass on the market compared to your competitors'. But do not stand in the middle.

Motivating the people

Despite what not-Italians may think, Italians do not like singing, hate the mandolin and work hard. However, Italians have a strong individual attitude and they like to work as entrepreneurs: therefore an effective management in Italy knows that people has to be motivated especially if working for a foreign corporation. Motivating is not only a matter of salary and bonus, it involves being part of a long term strategy. Which is different from making some money in Italy and then walk away.

Have a local partner

We all know that the global strategy must meet the local culture. In Italy this aspect is crucial to your success. Establishing a company together with a local Italian partner may often be the easy and safe way to enter this market. Once the business will be sufficiently developed, you will then retain the whole company. Remember to set clear rules between you and the local partner and get appropriate financial control.

Have sufficient financial resources from the beginning

As a corporate finance advisor we often came across with international companies that completely miss their financial plans and then have to invest additional financial resources into the business. A successful strategy requires a much higher upfront investment then you may believe and almost none additional cash drain thereafter. A little additional financial analysis before starting will allow you to avoid surprises.

Be introduced and use connections

In Italy “who” you know matters more than “what” you know. Just accept it, and insert into your organisation people that have good local connections, both in your industry and in finance and banking. Remember that Italians are friendly with foreigners but do business with relatives.

Monitor the market for consolidation

In Italy many industries are under consolidation. This means that during the period in which you are running your business in Italy you will have the opportunity to acquire a domestic competitor. It is an opportunity to broaden your activity and market share but sometimes it may be a thread as one of your competitors might acquire that business before you do it.

Understand the Italian business culture

Italians love looking good, wearing nice clothes, being part of a respected social circle. In Italy fashion and status matter more than elsewhere. Should you enter this market thinking that you deserve respect for anything that your company might have done elsewhere, that does not work. Your company might be a world leader, but this means very little in Rome.

Use appropriate financial control systems

International accounting principles are now commonly used in Italy but small companies may require additional financial control techniques. Be sure that your Italian entity is fully equipped with the type of financial analysis and financial control that you require and always use an external manager and an external auditor to monitor what's going on.

Ask yourself why should you be successful in Italy

Do not underestimate how difficult this market may be. Spend some additional effort in studying and understanding the market and creating an appropriate strategy, do not copy and paste the slides that your marketing department has prepared for France.

Listen to what Italian managers tell you and bring their ideas at headquarters

Managers in Italy are used to handle problems in a difficult and multi cultural environment and they are generally more creative and prompt to reaction in rapidly changing industries. They may be a great HR resource for an international company, don't miss this opportunity.

In conclusion: there are great opportunities to do business in Italy but you need a “glocal” strategy to grab them. Did we miss anything?