Greek tragedy

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The Greek government has a property plan to get the country back on its feet. Words and pictures by Kat Spybey in Athens

The heat is rising in Greece. As the mercury hits 40 degrees Celsius in the summer sun, international pressure is bearing down on the ailing Mediterranean country and its embattled property market.

The streets of Athens are deserted. The Greeks have left for the summer, but few tourists have come to replace them. Syntagma Square, once the focus of anti-austerity riots, is now eerily quiet. Anger seems to have given way to disillusionment.

Former retail parades in the city centre, once lined with shops and teeming with consumers, are boarded up and plastered with anarchist graffiti. Hotel rooms are empty. Secondary office blocks lie vacant. The teetering economy and property market have ground to a halt.

With the possibility of a Grexit — Greek exit from the euro — looming, as European Union partners’ patience runs out, Property Week visits Athens to see the effects of the crisis on the property market and to gauge whether the government’s latest package of rescue measures can pull it back from the brink.

PIGS denial

In its fifth year of recession, data published this month by the Hellenic Statistical Authority show the Greek economy has contracted by 6.2% year on year in the last quarter, and 13% over the last two years. The government has already been pledged €240bn of EU bailouts, and is still trying to agree €11.5bn of spending cuts, representing 5.5% of GDP.

Investors such as Pradera Europe, which owns around €100m of assets in Greece, say they are now simply “battening down the hatches and looking to ride this out”, while striving to preserve as much value as possible.

Yiannis Perrotis, managing director of CBRE Atria, describes what he calls “a depression” having now caused a “total destruction of psychologies” across the industry.

For Greece, the history of its property market is inextricably linked to the euro: the market came alive when the country joined the single currency in 2001. A drop in interest rates made mortgages more affordable and the economy opened up. Now its fate rests on the question mark hanging over Greece’s eurozone membership.

The first message the Greeks are desperate to get across is that their property market is not like that of Spain, Portugal and Ireland, where cheap debt fuelled a boom in over-leveraged schemes. Bank lending on property was restrained, and the market was largely the preserve of cash-rich Greeks seeking a safe place to stow their money.

Research by Cushman & Wakefield shows foreign investment totalled just €50m over the past three years, and €987m over the last 10.

Unlike Spain, Greece has none of the abandoned, half-developed ghost towns.

CBRE’s Perrotis explains there has been little large-scale development, as the planning system has been “extremely constraining”.

The Supreme Court, he says, has taken an “extreme anti-development and pro-environment stance”, blocking most sizeable schemes after they have received local authority permits. Among the schemes stalled in this way are Minoan Group’s Cavo Sidero holiday home project in Crete, which has languished undeveloped for 10 years, and the conversion of two Olympic venues into retail schemes, which, like many of the host’s schemes for the 2004 games, remain empty.

The Greek property market was a victim, rather than a key contributor to the economic collapse, which was largely caused by the ismanagement of the public sector, which was hugely inefficient, bureaucratic and tolerant of widespread tax evasion.

As the future direction of the Greek economy is shrouded in ambiguity, the property market has become paralysed and no one is willing to make the first move.

Any development that did make it through the complex planning system is now likely frozen because of a lack of bank finance; prospective Greek investors are worried about their future incomes as unemployment soars to 23% and austerity measures bite; and foreign investors are seeking greater clarity on Greece’s future inclusion in the eurozone, and waiting for prices to bottom out before investing.

“Speculation around the Greek exit from the euro is not the best guarantee for your investment,” explains Eri Mitsostergiou, a director of European research at Savills.

Dimitris Andritsos, CEO of Eurobank Property Services, adds that banks in Greece have limited property exposure on their balance sheets so are in no hurry to force distressed portfolio sales. “Banks are not willing to force a sale at a discount because values are still falling. Instead they are trying to help landlords to support their cashflow.

“As long as we don’t have real interest from investors in Greece, it’s really difficult to know what the real price is for something. After five years of recession, why sell now, when you could wait two more years for the recovery?”

The Greek property market is really pathetic right now

Andreas Taprantzis, Hellenic Republic Asset Development Fund

Cushman & Wakefield estimates prime yields in Athens now stand at 8%-9%, but this will be significantly higher for secondary assets.

The number of transactions is thought to have dropped by around 75% from a peak in 2008, which agents say is now putting significant pressure on fees and has forced some smaller brokers to close.

One of the worst-affected sectors is the high street. The Greek retail market is largely made up of high street parades, which are shrinking at a rapid rate. Voids on the remaining core parades are said to be around 25% but, outside this, entire blocks of shops are boarded up and falling into disrepair. Stadiou Street, which links Syntagma Square and the parliament with Omonia Square’s offices and banks, is estimated to have around 42% of its shops closed. Retailers on this dejected street have also been plagued by the riots of the last two years, forcing them to shut for long periods.

Many small and medium-sized high street retailers “have vanished” and tenants are increasingly renegotiating rents, often including “turnkey” investments towards fit-out from landlords and significant turnover elements.

Colliers International estimates that rents fell by 25%-30% last year and will continue on a negative trend this year. Even prime parades such as Ermou Street, Athens’ equivalent to Oxford Street, are not immune. The street appears busy and is occupied by many international brands, but pre-crisis it commanded a rent of €250/sq m with “key money” paid by the tenant, which is now down to €180/sq m with no premium.

In a bid to help struggling retail and office tenants alike, the government implemented the “Katseli Law” in April 2011, which dealt a massive blow to landlords. This legislation enabled tenants to break a lease with just three months’ notice and a penalty of just one month’s rent, instantly creating a tenants’ market. The law is scheduled to end in December, but is expected to be extended.

James Bury, head of European fund management for Pradera Europe, owner of the Village Shopping and More leisure scheme in Athens and the Florida 1 Retail Park in Thessaloniki, says the law “completely changed the dynamics of the relationship”.

“The ball is now in tenants’ hands. We have had to agree rent concessions, otherwise tenants just say they will leave the units. Very few people are expanding and those that are, are doing so on the back of soft deals from the landlords. We are just trying to preserve as much value as possible and waiting for the Greek story to play out.”

The state of Greek property

Retail:

Vacancy: 25% on core high streets, rising to more than 40% in more secondary areas. Shopping centre vacancies lower, at 10%.
Rents: High street rents dropped by 25%-30%. Shopping centre rents down 12.5%

Offices:

Vacancy: Prime is around 10%, but rises significantly for secondary.

Rents: Prime rents dropped 13%, but rent negotiations on secondary assets have cut rent by 30%-40% (graphs)

Residential:

House prices: Dropped by around 20%, but this increases to around 40% for houses in the €800,000-€2m price bracket, which target wealthy professionals now being hit by austerity measures

Second homes:

House prices: Dropped by 30%-40%, as they also targeted Greek investors

Hotels:

Occupancy levels in the first half of the year dropped by 3% across Greece and 10% in Athens as tourists expressed concerns about political uncertainty and the economic impact on operators. In the last year the revenue per available room has plummeted by 14%.

Holiday plans

One market where there is more hope is that of tourism and second homes. Christie & Co reports hotel occupancies and revenues have plunged and the value of second homes has been severely hit during the ongoing crisis (box, above), but this is where Greece is now pinning its hopes for a revival.

The beleaguered country is preparing for a development spree aimed at capturing lucrative foreign investment and focused on its tourism heritage. The 16.4 million visitors it attracted in 2011, alongside other services, contributed 70% of its GDP. The government wants to reform the complex and opaque planning system to enable the development of large-scale leisure and second home resorts — with a particular emphasis on golf facilities — in a bid to start an economic revival.

This is being led by a €25bn privatisation of 82,000 state-owned assets through the Hellenic Republic Asset Development Fund. Andreas Taprantzis, executive director of the fund, explains that 3,000 predominantly leisure and tourism- oriented projects — valued at around €10bn once developed — have been prioritised.

These assets will be put into a Hellenic Land Equity Fund, which in June 2013 will undertake an IPO (initial public offering). Investors will be offered 5% of the fund, raising around €500m. This will be used to progress schemes’ land preparation and planning applications. Private sector tenders will then be sought for individual schemes, which will have an average value of €75m-€100m.

Taprantzis says: “If I go out and sell 100 properties now, that will create overwhelming supply in a market that is already ailing, so it will hit prices.

“The Greek property market is really pathetic right now. But over time this fund will give the economy and property market the boost it needs and attract foreign investors. Construction accounts for 15% of GDP and has been dying for the last three years, but this will reignite it.”

The fund’s biggest project by far is already progressing: Hellinikon, the €5bn regeneration of the old Athens airport. The 6.2m sq m mixed-use development is twice the size of Hyde Park and has 3.5 km of coastline. Development could start in 2015. It is expected to take seven to 10 years and could contribute 0.3% of GDP each year.

Expressions of interest for a majority stake in a special-purpose vehicle to control the site have already been submitted and a shortlist is due to be announced next month. London & Regional, Qatari Diar, Israeli investor Elbit and Greek developer Lamda Development — which is now shifting its focus from retail to resort and second-home projects — are likely to make the cut. Donald Trump is believed to have bid, but is unlikely to be shortlisted.

Another key project being progressed is Afantou in Rhodes, which will be a golfing and holiday resort with a projected development cost of around €150m. A shortlist is also expected in September. London & Regional, Lamda, Minoan Group, Greek developer TEMES, Atlantica Hotels and Resorts with travel company Tui and private equity firm NCH Capital are among the bidders.

The fund also plans to undertake a sale and leaseback of around 28 government offices, for which a tender process will be launched in October.

Hopes for the success of the fund are running high, and many in the property market are convinced this is the way Greece will pull itself out of recession.

Dimitris Zontanos, head of Greek development at Lamda, says: “Foreign investors are looking at Greece, but not looking to invest, as they can’t see the big picture of how it will move on. Hellinikon will be a sign to foreign investors that Greece is back on track. It is so important to get back to the idea that Greece can make it.

“Crisis creates opportunities and a need to change, and we hope this will be the point where we start rethinking Greece and re-engineering the whole situation. We need to bring in foreign investors. We need to make destinations. We can’t make destinations on our own — we need foreign investors to develop alongside us. Perception can be more dangerous than everything being ruined, and we are now working to change current perceptions.”

Ana Vukovic, managing director of Colliers International in Greece, adds that Greece is cautious not to overdevelop: “We will learn from where Spain and Portugal went wrong. We can use those markets in our research and preparation for the future.”

But Greece will have to fight for the investment and make a strong case, as it will have to compete head on with other distressed markets across Europe, which foreign investors will already know and have experience of operating in.

The consensus is that Greece has not yet reached the bottom. The most optimistic estimates suggest the economy could start to grow again in 2014. The Greeks are adamant they will not quit the euro and the ongoing crisis is “a European, not a Greek problem” that should be resolved with tighter fiscal and monetary union.

The rest of the world is not so sure. If the country cannot reform its planning policy and become more attractive to overseas firms the heralded privatisation project could struggle.

But Eurobank’s Andritsos remains defiant: “We have learnt a lot since 2009 but we are now ready to move forward. Tourism, second homes, and the privatisation programme will lead the way. We have a plan.”

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