Greece is a country of opportunities and frustrations. Economic prospects are very positive - potential GDP growth is above 3% (ie, 100 basis points above EU average) and income per capita is quickly catching up with the Euro-zone. The 2004 Olympic Games in Athens triggered a great boost in investment activity, including major infrastructure improvement. The office market is emerging, but needs some time to mature, while the retail market is still in its infancy. Yields are generally attractive, but poor institutional quality hampers the arrival of more international investors into the country.
Greece is a highly centralised country – Attiki (the Athens region) hosts 33% of the Greek population, produces 40% of its GDP and consumes close to 45% of total private consumption. The second largest region is central Macedonia (whose capital is Tessaloniki) with close to 20% of the population. These are the only two areas in Greece where international investors can find real estate assets that meet international standards.
The Athens office market is an emerging market, ie, rental levels are chiefly determined by building specification rather than location. This is a consequence of both low availability of modern office stock (25% Athens’s office stock is Grade A compared to 65% in Brussels) and high owner occupation.
Emerging markets are generally over-rented relative to the level of economic activity they host. Rents have a tendency to decrease as more modern stock becomes available. In this context, it is not surprising that prime rents in Athens are €360/m2 annually, while in Lisbon and Barcelona (two cities with similar population, office stock and income per head, but with a more mature office market) prime rents amount to €228/m2 annually and €276/m2 annually respectively (see chart below).
A market matures when grade A buildings virtually become a commodity and location (rather than specification) becomes the main driver of rents. Furthermore, a particular area (the central business district) arises as the prime location.
The 2004 Olympic Games substantially paved the way to maturity for the Athens office market. A large amount of modern office space was released after the event and quickly taken up. This put some downward pressure on rents but made a big step towards market maturity and rent stabilisation going forward.
The Greek retail market is even less mature. Greece suffers from one of the lowest shopping centre densities in Europe. This is mainly due to the highly cumbersome planning process, which makes it almost impossible to develop new out-of-town retail. There are some large schemes currently in the pipeline that may help to relax this chronic undersupply of shopping centres. Demand fundamentals are very positive for the retail sector – retail spending is buoyant and population density is high. The few large retail schemes currently trading are highly successful. There is strong rental growth potential. It is difficult to quote rental levels given the small size of the market.
To the investor, Greece is a country of contrasts. On the one hand, investors enjoy plenty of growth opportunities, but, on the other hand it can also be an ‘exhausting’ market in several ways. Tax structures are generally arcane - property transfer tax is 11% and capital gains tax is 35%, which makes any property deals virtually impracticable – there has been some progress in that direction. Corporate vehicles that can somewhat attenuate this tax leakage are currently available. Furthermore, REIT structure may well become available in the early future, according to some local players. This should add a layer of transparency and pave the way for new investors into the market.
Bureaucracy is so rampant in Greece it has been rated second lowest in the EU in terms of ‘institutional quality’, (which measures the number of days needed and the number of permits required for starting a new company, the education level of the civil service, etc) and the most highly regulated. The cumbersome planning process referred to above is a major drawback, but also provides an opportunity for investors who can make their way through the bureaucratic structure.
In terms of size, the investment market is thin: DTZ estimates that percentage owner occupation across sectors exceeds 90% (ie, invested stock is just 10% of total stock, one of the lowest levels in Europe). This is also a drawback, but also an opportunity for investors to take advantage of the huge externalisation potential on a case by case basis.
The externalisation process has begun. Some sale and lease-back transactions are currently taking place in the form of equity withdrawals; ie, corporates release a portion of equity from their properties to a bank in exchange of a sum of money. The bank then collects rents from them for a number of years and gives back the property at the end of the term.
The Greek investment market is also immature – private property companies and individuals represent the main source of capital in the market (over 50%). Private debt (chiefly from commercial banks) is the second largest source with 35% of the invested stock (see table above). Private property vehicles are virtually non-existent, insurance companies and pension funds rarely invest in commercial real estate and the weight of public property companies is negligible. This sort of market structure suggests a highly immature market. Furthermore, ownership is generally fragmented and large lot sizes are especially difficult to assemble. This structure may deter large investors from this market, but also poses an opportunity for relatively small and sophisticated investors willing to bear the cost of searching for good products.
The market is dominated by local investors, who generally apply a lower risk premium to Greek property than international investors. Cross border transactions into the Greek market were nearly zero in 2003, and well below €200m in 2004. Data suggests Greece is not among the ‘strong buy’ markets in Europe for 2005.
Prime initial yields in the Athens office market are over 7.5%, while only 5.5% in Barcelona and 7% in Lisbon. This is obviously an opportunity to take advantage of high yields and yield compression potential as the market matures and more risk averse investors are attracted to it.
The Greek property market has plenty of opportunities – high economic growth, externalisation potential, yield compression and rental growth (especially in the retail market). But it is still immature and non-transparent both on the occupier and investor side. The Olympics was a big benefit for the country as a whole, but there is still a long way to go. Greece provides a market for courageous direct investors with deal structuring expertise, local knowledge and experience in the market.
Jose Luis Pellicer is head of research at Rockspring PIM