The Greek residential property market has been in a strong up-cycle since 2018 and it is not uncommon to hear or read about market forecasts for the next few years. Some participants believe (or hope) that the market will continue strong, while others see (or hope) a slowdown or an outright burst of what they name as a bubble. In our view, the current recovery is a real one with improvements in many fronts such as business and political environment, fundamentals and sentiment. Reality is though, that all investment markets inevitably go through cycles and the Greek real estate market will face its next downturn at some point with its timing, intensity and duration, virtually impossible to predict. At Resi Company we are formulating and constantly evaluating a market view and employ prudent risk management practices to address this.
Hello everyone.
It has been quite a ride. Athenian property prices dropped almost 45% after the Global Financial Crisis, eventually finding a bottom around 2018. Since then, however, they have rallied almost 90% and currently sit 5% above the 2009 peak.
It is not unreasonable then to ask some of the common questions out there; is there a residential market bubble? how will the market perform in 2025 and beyond? will the market perform equally strongly over the next five years or will we experience a downturn? how severe will a potential downturn be?
FORECASTS, BEHAVIORS AND INVESTMENT PHILOSOPHY
Investment markets, such as equities, bonds and real estate have always moved in price cycles. Not always well formed cycles and often outside equilibrium levels for long periods of time, but inevitably, market forces move them cyclicly.
Below an example from US equities using the S&P 500 price index to illustrate these cyclical price movements.
Source: St. Louis Federal Reserve
Similarly, if we look at Greek residential real estate prices, we see a cyclical pattern, where the market is forcing prices up and down, often for long periods of time, such as the price declines during the recent Greek crisis and the subsequent recovery we are currently undergoing.
Source: Bank of Greece
In order to address these cycle considerations, sophisticated investors try to remove as much of the human behavioral biases when making decisions, as these biases typically lead to wrong decisions. And while this is often the intention, it is very typical, when things are doing bad for some time, investors refraining from doing investments at low prices and vice versa when things do too well for long time, investors being carried away from the positive sentiment. As a result, risk taking increases, investments start to be of worse quality for higher prices and risk management practices become looser. And a big part of this is driven by investor psychology.
Another suboptimal practice in our opinion, is relying too much to inflection point forecasts and trying to time the market and trade in and out as a standard practice. Forecasts produce results based on available data and investor market views, with both practices being fraught with weaknesses and investors end up with inaccurate results. Particularly in real estate, this weakness is even more pronounced due to the illiquidity of the asset class and the infrequency and quality of available data.
How many thought that in 2015-16 the US equities were overpriced and sold off waiting for the next downturn to give them a low entry point? or how many thought that during Covid we would see a global crisis far worse and longer than the 2007/8 Global Financial Crisis (GFC)? or how many forecasted the actual GFC recession?
Below is a made-up example of interest rate forecast revision history vs actual US interest rates movement, based on the general forecast sentiment at the time. The graph, although not factually accurate with regards to the forecasts, represents a anecdotal visual illustration of what many reputable forecasters were forecasting at the time, following the 2009 period when the Fed dropped interest rates to virtually zero as a response to the GFC. Initial forecasts were assuming a gradual normalization to higher interest rates, however when this did not materialize, they were then pushed back and then again, but reality had its own course. Anyone that had acted on that forecast information, most probably made suboptimal choices.
Sources: St. Louis Federal Reserve, Resi Company
THE MUSIC KEEPS PLAYING FOR GREEK REAL ESTATE
Greece has been experiencing one of the strongest recoveries in the developed world over the past few years. Property isn’t an outlier of course, as GDP and wages have both grown about 30% since the trough, retail spending is up 120% and FDI is up a staggering 113 times. We’ve also seen good news on Non-Performing Loans (94% down – although part of this risk has been transferred and still exists) and unemployment (19% reduction).
Meanwhile, the political environment has been the most stable the country has seen in over 15 years (although some cracks might be surfacing following certain incidents), although sadly this does not appear to be a global trend. The Greek government appears focused on creating a more efficient and business-friendly environment, and the FDI figures quoted above suggest that this narrative is resonating with global investors. On the real estate side, the trend has been most evident in the increase in investment volumes and a number of large regeneration projects, such as the “Ellinikon Project”, the Stadiou street regeneration with the (re)entrance of the major Greek banks, the (re)establishment of Kifisias avenue in Marousi area as an office hub, new metro stations and other infrastructure projects taking place.
Against this, rather bright, background, Greece is facing challenging demographics going forward. At the same time, we still face a very real issue of affordability. Prices, and rents, have outpaced wages, and Greeks spend the highest proportion of their income on housing in the EU (at 35.2% in 2023 per Eurostat). The period of austerity has also left deep scars, and recent growth is still leaving too many people behind. There is no need to look very far these days to see the negative implications of unbalanced growth and we think housing, being part of the problem, is also part of the solution. You can read more on our views on that subject in our note here where we note our belief that further incentives will be needed to help increase the housing supply.
In this context, we remain cautiously optimistic for the future. Athens continues to display an impressive economic recovery, and the drivers of that growth remain intact. Additionally, we continue to witness inefficiencies in Resi Company’s market of choice, the living sectors. The residential stock in Athens remains in need of significant improvement and development and displays a structural demand/supply imbalance that is unlikely to be resolved any time soon. We also believe that Greek residential needs, and deserves, better and more professional investors and operators who can provide quality product and service to tenants and potential buyers. We are committed to play our part and continue to build out our business in the residential sector and subsectors and increasingly focus on the rental side.
At Resi Company we are big proponents of prudence as we think predicting inflection points is too hard, so we find it useful to also ensure we can survive them. The rules we follow to get there are below:
Prudent debt levels: Debt levels that can be comfortably served and interest rate scenario testing
Avoiding risk creep: Unless this is driven by strategy and investment philosophy, refrain from climbing up the risk curve to maintain returns as prices rise
Scenario analysis: What would happen if the market crashed tomorrow? Have a good idea of how cash flows and solvency will be affected and draw a solid plan of what to do in that occasion
Market Monitoring: Monitor a set of economic, political and asset specific absolute and relative indicators for significant diversions from equilibrium and create a market view
Philosophy-wise, creating, maintaining and evolving a market view is an integral part of our business, however, we refrain from employing market timing strategies without a back up plan. At Resi Company we believe in long-term strategies and solid risk management practices, while when short-term investment goals are pursued, a series of prudent investment principles are applied to mitigate unknown risks.
You can see our projects here
