ULI Greece and Cyprus: Greek Real Estate Market Outlook

Athens was ranked 29th among 30 major European cities based on the responses of global and European real estate industry experts that participated in the joint ULI and PwC Emerging Trends in Real Estate® Europe 2017 report survey.

Eurozone membership uncertainty, political risk, and the migration crisis seem to have been the main barriers hindering international investors from looking at allocating capital in Greek real estate markets. On the other hand, local experts have said that the market is now merely standing at its lowest point, with pricing almost 50% lower compared to a decade ago. With the latest agreed reform agenda – part of the latest bailout agreement – and increasing investor appetite in acquiring non-performing real estate loans of major Greek banks, the near future looks more optimistic.

If we are to take a deeper look into the local market, what has really changed during the last 12 months? What kind of investment interest was witnessed and which asset classes were favoured?
 

What do the macros say?[1]
  • Unemployment has started to shrink, at 23.1% as at the end of Q3 2016
  • Latest Harmonised Consumer Price Index at – 0.2% · Q3 2016 GDP has risen 1.8% y-o-y
  • Gross public Debt remained at an all time high at 181.6% of GDP
  • Public budget deficit was successfully contained at 2.5% of GDP
  • Public budget primal surplus increased to 2.3% of GDP
Where does the market stand?

In the residential market, prices kept falling across all segments, albeit at a lower pace compared to 2015, while rents for mid- and higher-quality dwellings seemed to stabilise. Speculative developments, which are scarce and mainly located in prime residential areas, are usually of high end specifications and full equity financed.

In the retail market, the traditional high street destinations have rebounded, with vacancy rates recorded below 5% in the main commercial roads of central Athens and of the affluent suburbs. The considerably reduced rental values of previous years combined with the departure of key money have led to new retail chains entering the market. Ermou street in the Athens centre, ranked 25th among the most expensive streets worldwide[2], keeps the lead with average monthly turnover reaching €10,000/m² for high street brands.

Shopping malls continue to resist recession, with vacancy rates in traditional malls below 4% and rental values stable. Two new regional malls have come to the market and accounted for 7% of the overall stock, which proves there is further room for expansion, given also the lack of quality stock. Gross initial yields are currently between c. 8% and 9%. In addition, increased activity had been recorded in the big box retail sector, where apart from the entry of new DIY brands, traditional players were active in further expanding within urban areas, in contrast to their past regional priorities. This was a consequence of lower rental values and repositioning opportunities in existing retail facilities.

The office market was weak overall, with prime rental values stabilizing and gross initial yields compressed further below 8%. Second tier offices, which constitute the majority of the local office stock (ageing properties with no high-tech specs, etc.) continue to lose competitiveness, with average rental values well below €8/m2/month and gross initial yields exceeding 9%. Speculative development in the sector is still scarce, mainly because prime rental values continue to be below € 15/m2/month, rendering development unviable.

Under these conditions and given that the ageing stock is unable to secure long term tenants at competitive rental values, commercial landlords and investors have started to focus on energy efficiency and technical upgrade of their existing portfolios. They are also looking for obsolete buildings with repositioning and upside potential under different commercial and mixed-use scenarios. Fragmented ownership remains a major barrier and a difficult puzzle for institutional investors to solve, while strong interest for new space is not expected before further clear and sustainable signs of market, economic, and political stability are seen in the country.

In the industrial and logistics sector, increased demand in freight forwarding services has resulted in vacancy rates below 5% for quality properties over 5,000m² in the established regional areas of Athens (northern, eastern and western city gates, where more than 2 million m² logistics space is concentrated). New infrastructure investment is expected in the Piraeus Port by COSCO, the new major shareholder and manager of the port after its successful bid in the privatisation contest in Q2 2016. The ongoing investment, combined with the port’s railway connection to the Thriasio Freight Center completed three years ago, has dramatically reduced the delivery time of freight from Asia and Eastern Mediterranean to the European mainland. In addition, the assignment of Thriasio Freight Center management to the ETVA – Goldair Handling consortium in Q3 2016 is expected to upgrade further the logistics and distribution capabilities of the centre, under a €180M investment programme in the next 10 years.

The hospitality property sector is witnessing strengthening fundamentals due to increasing international arrivals for a third consecutive year (23.5 million in 2015, 6% y-o-y increase[3]), coupled with the characterisation of Greece as a safe European holiday destination. Investment activity in 2016 has mainly concentrated in renovation of existing hospitality properties and in the operational repositioning of obsolete office and residential buildings into city hotels. More specifically, during 2016, 14 units of 5* and 40units of 4* hotels opened adding 3.3% and 3% in each category’s stock, respectively[4].

The transactions recorded in 2016 demonstrate a trend for luxury and higher standards hotels of, mainly in the 5* category. Five major transactions reached an investment value of € 730M and comprised c. 1,700 rooms in total. The most important of these included the landmark properties of Hilton Athens and Astir Palace Complex in Vouliagmeni. Athens city centre hotel sector is rebounding, with c.600 rooms of 4* and 5* hotels added in the market, while a 340 room hotel will be soon upgraded and operated under an international renowned brand[5].
 

What are the key determinants for the year ahead?
  • A successful second bailout assessment review in Q1 2017 could give the right to Greece to enter the Europe Central Bank’s quantitative easing (QE) programme
  • The active management of non-performing loans (NPLs) of the 4 systemic banks could lead to successful disposal of big real estate asset backed corporate loan portfolios to experienced investors that follow a more hands-on approach
  • Completions of strategic asset privatisations including DESFA (gas distribution), TRAINOSE (railways), OLTH (Thessaloniki Port), AIA (Athens airport) and Afandou Rhodes
  • Kick-off of the development of the former Hellinikon airport to turn the area into a world class metropolitan park with mixed use facilities, covering 2 million m² in total. An investment budget of more than € 4,5 billion is expected for the next 10 years
  • Kick-off of the development of the ex-publicly owned land in Erimitis area on Corfu island, an asset of 490,000m² whose transaction was completed in late Q4 2016.The mixed-use hospitality investment development is estimated to exceed € 75 million within the next 6 years
  • Planned public and private investment co-funded by EU funds and major international development banks (EIB, EBRD) in large scale urban regeneration programmes could reshape derelict areas, develop new city hubs and result in capital appreciation in neighbouring building stock

[1] Hellenic Statistical Authority _ Provisional data

[2] Annual property report by Cushman & Wakefield titled, Main Streets Across The World

[3] Bank of Greece

[4] Hellenic Chamber of Hotels

[5] Arbitrage Real Estate
 

This outlook was written by members of the ULI Greece and Cyprus Young Leaders Group.