Italy must shore up its laws to attract global capital

The dubious case involving Blackstone in Milan is only the latest obstacle for foreign investors.

Italy seems set to become the first G7 nation to endorse China’s Belt and Road Initiative with Chinese President Xi Jinping in Rome this week to finalize a deal with the country’s leaders.

In joining China’s ambitious trade pact, Italy will expect greater access to Chinese capital markets amid renewed investment from the world’s second-biggest economy. That is despite the US and broader EU denouncing the BRI as a power play by a ‘systemic rival.’ Regardless, Italy appears undeterred by the concerns of its democratic peers, placing the resuscitation of its sputtering economy as a greater priority.

But if Italy is to cure its economic ailments with an injection of foreign capital, it would be wise to address domestic concerns about its rule of law. We need look no further than the country’s private real estate market, where a spurious litigation brought against Blackstone by a disgruntled seller is unnerving foreign investors and rightly so.

RCS Media Group, publisher of Milan’s Corriere della Sera newspaper, filed a suit against the American private equity real estate titan last year. It claims Blackstone violated Italy’s usury laws when it purchased the newspaper’s Milanese headquarters at Via Solferino 28 for what it considered to be a bargain price of €120 million in 2013. RCS only agreed to the low sale price, it argued, because it was in financial distress. It wants the sale nullified and the property returned.

In most free markets, the idea that a transaction could be revisited and potentially reversed years later because one party would “obtain unbalanced benefits and returns,” to quote the lawsuit, would be farcical. In Italy, it is being considered by an arbitration court. This is problematic on multiple fronts.

Last summer, Blackstone was on the verge of selling the property to Allianz Real Estate, the real estate business of German insurer Allianz, as part of a deal valued at €250 million. Only after that news became public did RCS claim to be the rightful owner of the building and contest its sale in court. The deal with Allianz has since stalled. It may fall through as a result.

The lawsuit has also had a chilling effect on investment in Italian real estate broadly. One fund manager told PERE his firm put an acquisition in the country on hold until the issue is sorted. Facing the prospect of having the state rescind the sale later, that feels logical.

Other firms are watching from the sidelines as well. At least one is ready to relegate Italy into “an emerging market bracket,” depending on the outcome of the case. This is, in part, because the country has a reputation of being unwelcoming to business. Permitting is arduous, taxes are high, contracts can be difficult to enforce and local partners are often litigious, PERE understands. The World Bank ranks it 51st in its Ease of Doing Business index, the lowest among the Group of Seven nations and below several former Soviet states.

A great deal of investment in Italy comes from across borders. Since 2014, international investors have accounted for two-thirds of real estate capital, according to CBRE, most coming from the US, France and the UK. Close to €30 billion, in total, has flooded into the Italian property market since its last recession.

Those that have withstood the country’s difficult business environment have typically been rewarded – total returns have climbed from 1.4 percent in June 2013 to 6.2 percent in June 2018. However, past performance will only do so much to quell future concerns.

There are many ways for Italy to make itself more attractive to global investors. A good place to start is confirming the country’s courts will not unduly interfere with their investments.

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