The WSJ reports,"many foreign investors that have shown up in Italy to buy property from financially stressed governments and institutions have been discouraged by the slow pace of sales.
But there is a recent exception to this rule: Deals have begun to flow out of two funds that were set up by the Italian government in 2004 to do sale-leasebacks of government-owned property.
Blackstone Group LP, Cerberus Capital Management, LP, and Och-Ziff Capital Management Group are buying properties from these funds that are occupied by barracks, police stations, ministries and other government offices, according to people familiar with the matter. The total value of three deals expected to close this summer is over €600 million ($816 million), people said.
The two 10-year-old funds are owned by Italian banks and institutional investors. One of them—Fondo Immobili Pubblici, managed by Investire Immobiliare SGR SpA—purchased €3.7 billion of government-occupied properties and leased them back to the government. The other—Patrimonio Uno, managed by BNP Paribas Real Estate—purchased and leased back €700 million of buildings.
Together, the funds own hundreds of properties. The recent sales won't make a dent in Italy's public debt of over €2 trillion because the funds aren't owned by the government. But the deals are a sign that the slow recovery of the European economy is increasing demand for Italian property.
More deals are expected. Fondo Immobili Pubblici is scheduled to liquidate by December 2019, with a possible extension to 2022. Patrimonio Uno is scheduled to liquidate by December 2017, with a possible extension to 2020.
Sale-leasebacks are popular with investors because they offer a guaranteed steady rent stream as long as the leases last. The Italian state leases over 11,000 properties and pays €1.25 billion annually in rents, according to data from Agenzia del Demanio, the agency that manages the state's real-estate assets.
Lately, many sale-leaseback deals with the Italian government have taken on a new level of risk. Under recent laws passed in the wake of the financial crisis, the government has given itself rights to cut its rents by 15%, and to break a lease without notification to landlords.
Overall, commercial real-estate sales volume in Italy has been increasing as the euro zone has recovered from the financial crisis. CBRE Group Inc. predicts that there will be about €5 billion in Italian commercial-property sales in 2014, compared with €4.6 billion in 2013.
Blackstone was one of the most-active buyers of Italian real estate in the first quarter of 2014, with acquisitions of a portfolio of logistics warehouses and another portfolio of office and retail assets.
Now, Blackstone is in exclusive talks to buy a Fondo Immobili Pubblici portfolio of nine office buildings for €240 million, according to people familiar with the matter. The portfolio includes offices of the Italian Revenue Services and of the Ministry of Finance in the Northern cities of Turin and Pavia.
The Italian government has been reluctant to rely on new sale-leaseback deals to address its current financial problems. These deals provided cash flow in the short term but bound the state to pay millions of euros in rents. They aren't seen as a long-term solution to reduce Italian public debt.
The government has focused instead on a program to sell islands, castles and other real-estate assets that it currently doesn't use. This effort has been slowed because investors haven't been willing to pay the government's prices".
