We are exploring where the Greek real estate market is heading as it is being pulled by opposing forces. Local cyclical and structural tailwinds and international headwinds.
There is a growing debate on where the Greek real estate market is heading, as it is expected to increasingly be pulled by opposing forces.
On the one hand, headwinds from the US, UK and EU side are looming, as high inflation has caused interest rates to rise to highs last seen in the 2007-2008 era. This is affecting investment sentiment, as debt servicing is becoming expensive and future refinancings pose a risk. Valuations are being affected, listed real securities are trading at steep discounts, while GDP growth is faltering and recession worries are mounting.
On the other hand, Greece is enjoying a strong real estate recovery, following the 2009-2018 deep real estate crisis, stemming off a depression that the economy went through for the good part of the decade, where GDP declined cumulatively by 30%. As a result of the crisis, investments disappeared and new development went into a long-standing halt. Over the past few years though, and as a result of strong economic performance, pent up demand, a market-wide undersupply across sectors and business friendly government reforms, Greece has been enjoying a widespread real estate recovery.
So, what lies ahead? Will the Greek real estate recovery come to an abrupt halt, impacted by the West’s slowdown/potential recession, before it manages to deliver its full potential, or is it going to continue uninterrupted?
The Facts – The Yield Spread Story
According to Savills Research, Greek Prime Office Yields (will be referred to as “Greek office yields”) peaked at a level of 8.75% in 2013. At that point, the market offered a spread higher than 400bps to key European markets, however, they were still not attractive enough due to the dire conditions of the Greek economy. This argument is also supported by the fact that at that year, the spread of office yield with the Greek 10 year government bonds yields averaged at negative levels of -169 bps.
Source: Savills, St. Louis Fed
Five years later, as the Greek economic and real estate recovery were gathering pace, Greek office yields were still offering 300- 400 bps spread to other key office markets, but also a significant approx. 300 bps to the Greek 10 year government bond yield and more than 600 bps relative to other European markets’ 10 year government bonds. This signified an emerging significant attractiveness of the real estate investment market and as was the year that Greece surpassed €1bn in FDI in real estate.
More recently, as Greek office yields have been compressing, while interest rates and office yields in other European markets have been increasing, the attractiveness of Greek real estate comes to question, as Greek offices are offering spreads in the mid-100s compared to both Greek government bonds and other prime office markets. Is that sufficient to keep the success story going? There are reasons to doubt it, but also reasons to believe it.
Pulling Force #1 – Worries from the West
Following a sharp increase in global inflation numbers, the Fed has raised interest rates 10 times since March 2022, while the ECB and BoE have been following. As a result, the cost of debt has risen, creating an immediate difficulty to ones with existing floating rate loans, ones that need to refinance soon and to potentially new borrowers. At the same time, prices of both equities and fixed income have dropped, making them more attractive on the investment relativities table. GDP growth has been slowing down across the board and although no recession is visible yet (except Germany), an inverted yield curve in the US has historically been a solid predictor of that.
The above conditions are not ideal for real estate, and although the asset class is considered an effective hedge against inflation, when inflation is cost-push driven, such as the one we have been experiencing, it has been proven to be less effective. According to Green Street Advisors, prices in the commercial real estate sector in the US are down by 15% since last year’s all-time-high peak, while according to Vanguard Real Estate Index, the US listed REIT market is down by 31% since the late 2021 peak, underperforming the S&P 500. The situation in European markets displays a similar pattern, albeit at different levels.
Source: Green Street Advisors
Given then interdependence between economies and investment markets, especially between Western countries, we believe that if the economic and real estate downturn intensifies in the US and Europe, then it should spillover to Greece, albeit with a lag. However, Greece is in a much different cyclical and structural position than the West and the most recent numbers show it. Greece has outperformed the Eurozone in terms of GDP by a significant margin and has managed to curb inflation more effectively than the rest of the currency bloc. At the same time, office prices are still displaying capital value growth.
Source: Bank of Greece
Pulling Force #2 – The Aftermath of a 10-Year Crisis
During the almost 10-year long economic crisis, and while most of the Developed World was experiencing a decade of virtual zero interest rates and once-in-history yield compression, Athens Office Yields shot up by 300 bps to 8.75%. While real estate markets across the world were getting more expensive at record levels, Greece was getting cheaper at record levels. Greece completely missed the zero-rates cycle. Greece was running at its own speed.
Due to this mismatch, when the Greek economy showed the first signs of trough, it was presenting investors with an accidentally counter-cyclical opportunity. At a time where well priced real estate opportunities were almost impossible to find and investors had to constantly lower their return expectations or climb up the risk curve, Greece presented a compelling value.
Indeed, a combination of political stability, business friendly reforms, a booming tourist sector and a severe under-supply of quality property stock started unlocking opportunities. The market recovered fast and aggressively with prime office yields compressing by 325 bps to-date, while there are reasons to believe that the recovery is not done yet.
So is there a chance that Greece will continue running at its own speed, while other western economies slow down?
Where to from now?
Greek real estate has been in a unique investment sweet spot over the past few years. At a time when all developed markets have been at their most expensive levels, Greece found itself at it’s cheapest, with good recovery prospects. That has been Resi Company’s thesis since 2018, currently approaching €3 million of investments in the residential sector. See our projects here.
Currently, the market is in a very interesting crossroad, being pulled by opposing forces. Our belief is that, it is unavoidable that Greece is and will be affected by what happens in the West. If a recession hits the US and Europe hard, then Greece will be affected negatively in a fairly significant way in terms of growth. If, however, the US and Europe face more of a slowdown, then the Greek market is poised to continue faring well, given all the structural and cyclical reasons mentioned above. The Athens real estate market still offers compelling real estate investment characteristics backed by new and pent up demand for good quality, green offices, low new supply and a healthy spread over Greek and other European government bonds as well as other key office markets. Additionally, Greece offers a stable political environment and solid GDP growth prospects, which according to the IMF World Economic Outlook is expected to outperform the Eurozone and the US in 2023 and 2024.