16th ERES Conference Stockholm 24 - 27 June 2009

1. 16th ERES Conference Stockholm 24 - 27 June 2009 Real estate development and innovation. Integration and/or specialization? A survey of Italian companies Isabella Lami Marina Bravi Politecnico di Torino Isabella Lami

2. The building sector in Italy/ a • The range of firms operating in the building sector in Italy is now extremely varied. • On the one hand, there are small companies which often operate exclusively in the construction sector and, on the other, companies which manage large real estate ventures and which tend to turn activities into major financial operations. The latter proves that real estate development in fact does not exist outside of the domestic and international economic and financial system, and that its operators – real estate developers and builders – are capable of evolving in order to adapt to change. Innovation in construction sector Survey CONCLUSIONS Isabella Lami

3. The building sector in Italy/ b • A survey by the Italian National Association of Building Constructors’ firms predict that by the end of 2009 a drop of approximately 200,000 jobs in the sector (and linked activities) can be estimated. • In this context, construction firms are indeed forced to postpone or even give up undertaking new activities of their own due to credit restrictions enforced by banks which require the immediate restitution of funds and increase the spreads practiced on interest rates. Innovation in construction sector Survey CONCLUSIONS Isabella Lami

4. Innovation in construction sector / a • In the context of Community Innovation Surveyon innovation in enterprises, during the last four years a survey was conducted on innovation activities carried out by all Italian enterprisesin the industrial and service sectors. • According tothat aggregate vision the construction sector immediately appears underdeveloped and poorly innovative. The specifics of its peculiarities should instead be analyzed more in depth. • Constructions are very different from other production sectors: the products are made and assembled on the site where they are consumed; they vary in terms of size, technical complexity and quality. • Another particularity is that the level of exchange between organizations is the highest in absolute terms within the manufacturing processes. Innovation in construction sector Survey CONCLUSIONS Isabella Lami

5. Innovation in construction sector / b • Small and medium-sized firms represent the majority of firms in the construction system in Italy. • The pulverization and specialization of the firms is first of all a functional need to the fragmentation in sub-markets and to the cyclical trend of investments. • On the other hand, this structure presents a high potential for innovation, thanks to its FLEXIBILITY, even if this is hampered by: • a limited level of base resources; • a difficult access to technical-scientific knowledge; • a limited access to financing sources in order to exploit the acquired knowledge. Innovation in construction sector Survey CONCLUSIONS Isabella Lami

6. A micro approach by a survey of Italian construction companies The above-indicated considerations lead to a more in-depth analysis of the subject of INNOVATION in the construction sector, through a survey of Italian companies. We prepared a first questionnaire for this purpose: it was subsequently tested on a small but highly selective group which, in other words, took on the role of focus group. Innovation in construction sector • The questionnaire is structured in four parts: • 1) company details; • 2) company organization and its temporal evolution; • 3) economic results and financing; • 4) real estate development and innovation. • Based on the initial data but primarily on the verbal reports transcribed during the interviews, the following considerations were reached, which focus on the following topics: • company organization and its temporal evolution; • real estate development strategies and market diversification; • financing; • causes of innovation. Survey CONCLUSIONS Isabella Lami

7. Company organization and its temporal evolution • The Italian construction sector has traditionally been distinguished by family-run enterprises. • Nowadays there is a trend of company de-structuring. Most of the Italian enterprises have nowless than 20 workers, fact that , moreover, makes them less competitive abroad. • This trend is confirmed by the characteristics of the activities typically maintained within the core of the company, such as: administration; activitiesrelating to the management of the contract; dealings with suppliers, tenders and bids; safety in the workplace; verification of the project and its executive solutions; financial management and, at times, sales. • In addition, the fact that a company bond is created on a specific initiative makes the change currently underway even more fluid: • in other words, it would appear that the • entrepreneur is more important than • the enterprise. Innovation in construction sector Survey CONCLUSIONS Isabella Lami

8. Real estate development strategies and market diversification • The founding strategies adopted by the Italian enterprises during the construction and urban growth periods thus appear radically changed. • Today, in the search for the best locations, figures such as real estate agents and professionals have become increasingly more important. In this case as well, the level of exchange with various operators for economic and role purposes is on the increase. • The public sector is particularly important: in urban renewal operations the size of the areas to be transformed is such as to make it necessary that the public partner enters among the promoters and/or among the owners, configuring a new form of partnership. Innovation in construction sector Survey CONCLUSIONS Isabella Lami

9. Financing / a • Due to the recent financial crisis (and the consequential credit squeeze), the relationship between debt and equity shifted, obviously to the disadvantage of the former. • TRADITIONAL FORMS OF FINANCING STILL PREVAIL AMONG ITALIAN ENTERPRISES, such as the short- and medium-term credit line and mortgages. • Traditionally, in Italy, a financial approach based on the evaluation of an enterprise, rather than on projects legally and economically separate from the promoting companies, prevailed. In Italy works realized in project financing went from 6% in 2002 to 28% in 2006, to then stabilize in the last year to the same levels as 2005 (19%). Innovation in construction sector Survey CONCLUSIONS Isabella Lami

10. Financing / b • In the new context, certain enterprises stand out precisely because they propose a NEW DEVELOPER FIGURE. • This necessitates an increased knowledge of the market and, if necessary, turns to external consulting companies that are able to develop due diligence and advisoring. • These evaluations are increasingly more important (hotels, offices and commercials sectors), opposite to the private housing sector, in which there is more experience and in which the characteristics of the product determine the market. Innovation in construction sector Survey CONCLUSIONS Isabella Lami

11. Innovation factors /a • It is clear from this first focus test that the innovation factors, in the construction sector, are primarily considered EXTERNAL. • The first cause is regulation, which in Italy, as in most of Europe, disciplines the entire sector. Those interviewed found the same reasons for increases in cost in the burdensome bureaucratic procedures; on the one hand these referred to compliance with the regulations on safety in the workplace and the certificates attesting to social security contributions; and on the other hand energy saving and environmental sustainability for buildings. Innovation in construction sector Survey CONCLUSIONS Isabella Lami

12. Innovation factors /b • Product innovations, created essentially to respond to laws that are especially strict with respect to containing consumption for heating or cooling buildings, are utilized by the most competent entrepreneurs as a distinguishing element for a product, hence creating a new market niche, that of “certified” buildings from the point of view of the quality of energy. • It has been underlined that the control/integration of a process is a cost and that certain organizational innovations have been introduced specifically to facilitate relations with the various real estate development partners and with financial institutions. Innovation in construction sector Survey CONCLUSIONS Isabella Lami

13. Conclusions (in progress) • The survey on Italian construction firms, still underway, brings to light the complexity of this sector. • An initial analysis through a small focus group was necessary as a means of a preliminary exploration of such a varied universe. Certain theories have consequently arisen, to be tested in the definitive experiment. These theories can be summarized in many questions, concerning the following principal topics: • the capacity of Italian firms to implement special organizational strategies in response to the increased competitiveness of the markets; • the possibility to quantify the phenomenon of under-capitalization in the sector; • the connection between innovative forms of financing and new structure of the companies; • The market diversification as an answer to the trends governed, in part, by public policies; or in search of product/project-oriented competitive advantage. • IN BRIEF, WHAT DOES INNOVATION IN THE CONSTRUCTION SECTOR CONSIST OF? Innovation in construction sector Survey CONCLUSIONS Isabella Lami

14. 16th ERES Conference Stockholm 24 - 27 June 2009 For updates and further information please contact: isabella.lami@polito.it marina.bravi@polito.it Isabella Lami