Interview by Bank of Greece Deputy Governor Theodoros Mitrakos in the Newsletter of Greece Investor Guide: “How Coronavirus will Impact Greece’s Real Estate Market
05/05/2020 - Articles & Interviews
• The effects of the Coronavirus pandemic are expected to have a direct impact on the global real estate market; a key sector for Greece in terms of FDI. With investments in residential real estate in Greece having been mainly driven by the short-term rental market and the Golden Visa Programme, what is your outlook for this segment?
Indeed, the real estate market has been a key recipient of FDI in Greece. According to available data for 2019, FDI in the real estate sector amounted to €1.45 billion, up by 28% from 2018, and accounted for 35% of a total €4.1 billion in FDI flows into Greece. This increase of FDI inflows over the past couple of years can be attributed to the success of the Golden Visa programme for non-EU residents, but also to the development of the short-term rental market mainly in Athens and tourist regions.
Turning to the current situation, the COVID-19 pandemic, along with the necessary measures taken by the government to contain its spread, has inevitably taken a heavy toll on the Greek real estate market and related FDI. Foreign demand, which had been driving the recovery of the market for the past couple of years, is now non-existent, and major deals have been frozen or even cancelled amid heightened uncertainty about the duration of the current crisis and its impact on the real economy.
Investors are expected to take a wait-and-see stance in coming quarters, suspending or modifying their investment plans, anticipating a normalisation of the situation, of health data in particular, as well as possible pressures on prices and construction costs in the real estate sector. In coming quarters, foreign investors will first assess the situation in their core market, stabilizing their existing portfolio before proceeding with any new investments. Potential heavy losses in their core markets would cause them to postpone, or perhaps cancel, any investment in Greece. However, Greece will remain on the map for foreign investors, because it presents genuine investment opportunities and real estate valuations that seem to be relatively lower than those in competitor destinations. In the medium term, the Greek real estate market remains attractive. Prices are well below their pre-sovereign crisis peaks (down by 35% in residential property), allowing for handsome yields in an era of ultra-loose monetary policy. However, it should be noted that any policy responses and measures to support the market will significantly affect investors' decisions, as well as the timing and pace of implementation of real estate investments.
• With the shortening of the tourist season, landlords and property managers in many European cities have already begun moving their properties from the short-term rental market to longer-term models. Is this something you expect see in Greece as well? Do you expect a significant correction in terms of long-term rental prices?
The expected sharp decline in tourist arrivals this summer due to the current health crisis will definitely affect the Greek real estate market. Signs of structural shifts within the market are already visible. Initial evidence from online property rental ads shows that the dramatic fall in demand for short-term rentals in the context of tourist traffic restrictions has led to increased supply of apartments for long-term rental. More and more landlords are moving away from digital short-term rental platforms (Airbnb, HomeAway, etc.) to the traditional apartment rental market. Apparently, in view of the impact of the pandemic on tourism, they increasingly realise that their income will plummet in coming quarters, making their investment less profitable or unviable. It is noted that short-term rentals are a relatively new practice in Greece and have grown rapidly in recent quarters, while many landlords have taken out loans to renovate their properties for short-term lease. Falling rental incomes are putting strains on these investors’ financial position and debt-servicing capacity. Longer-term models are thus seen as a reliable alternative.
The re-shift of apartments from the short-term segment to the long-term one, despite the pressure it will put on rental prices, is not expected to lead to significant price adjustments in the long-term rental market. Most of the properties in question are a quite differentiated product, as they are rented furnished and fully equipped and in most cases have been renovated recently. So their rental prices are typically higher than those of the large real estate stock in the same area. In addition, they are mostly located in specific areas around the centre of Athens and other tourist spots across the country. However, the increased supply of properties for long-term rental is expected to intensify competition among landlords and cause them to revise their initial rental price expectations, exerting downward pressure on rental prices.
Finally, the aftermath of the current health crisis will likely result in the restructuring of the short-term rental market towards more professional management, with specialised management firms gradually crowding out small-scale property owners.
• How do you foresee asset prices evolving? How quickly can Greece’s real estate market recover?
The recent health crisis was a major shock to the real estate market. The upward trend of real estate prices recorded in most countries in recent years has now come to a halt, as both supply and demand are paralysed and any kind of deals are practically impossible to complete as long as the epidemic still unfolds. Uncertainties about the duration of the current health crisis and its impact on the real economy are very high and it is difficult at this time to predict where the real estate market and rents will balance out. The first incoming data show that both prices and rents are likely to come under pressure, at least in the short term, and the outcome will largely depend on the duration of the current extraordinary circumstances and the timing of the return of the economy to normal.
The high reliance of the Greek economy on tourism, which is expected to take a significant hit from the pandemic, exacerbates the problem of the real estate market. The duration of this impact is as yet unknown, as the possibility of a second or third wave of the pandemic globally and mainly in European countries, home to most tourists visiting Greece, has not been ruled out by medical experts. These negative effects are consistent with downward pressure and possible falls in real estate asset prices, after an upward path over the last quarters before the current health crisis (residential: 1.8% and 7.2% in 2018 and 2019, respectively; retail: 4.3% and 7.3% in 2018 and in the first half of 2019, respectively).
The real estate market is a peculiar market with significant linkages with macroeconomic developments and financial stability. The speed of the return of the Greek economy to normality and gradual recovery, the measures to support businesses and workers and the actual developments in tourism in the coming quarters will play a pivotal role in determining the recovery path of the real estate market and the evolution of prices. Restoring foreign investment demand and improving domestic demand by boosting household disposable income and employment and reducing unemployment are key to the recovery of the real estate market. Unfortunately, once the health crisis is behind us, it will take some time before we can have a clearer picture of how the above-mentioned crucial factors have evolved and shaped the recovery trends of the Greek real estate market.
It should be noted, however, that the reopening of land registries and the restart of court proceedings related to mortgages and foreclosures are among the first decisions made by the Greek government towards phasing out the lockdown. These recent measures directly support the revival of the Greek real estate market and the restart, albeit with some obstacles, of property title transfers, notarial deeds and registration procedures that underpin the operation of the real estate market.
Finally, it should be noted that countries like Greece with successful anti-pandemic programmes and Golden Visa schemes are more likely to be the focus of investor interest once the current health crisis is over. After this crisis, Greece can emerge as a safer destination for tourists and investors alike. Recent surveys suggest that Greece is gaining a stronger brand name, which can work positively in attracting tourists; this is one of the most hopeful messages for the Greek tourism industry, but also for the real estate market. These surveys reflect the satisfaction of visitors and businesses with the measures taken to address the pandemic in Greece, in contrast to their less positive assessment of the international response to the crisis.
• Which sectors of the real estate market will be mostly affected and what opportunities do you see for property investors within the current climate?
The unpredictable evolution of the COVID-19 pandemic is having significant negative effects which are broadly based across the Greek economy and the real estate market (tourism-related properties, residential, retail, etc.). However, the hospitality and retail sectors are probably the hardest hit in both Greece and the rest of Europe, especially in the European South.
In particular, the tourism-related real estate sector is expected to take a significant hit in 2020, which seems to be a lost year for tourism. Even if the best-case scenarios for the health crisis materialise, the hotel market, for practical reasons, will not be able to recover this year, as this would presuppose the full restoration of air transport connections and other important infrastructures which at present are slack and are also likely to come under financial stress.
Significant pressure on the valuations of commercial real estate and respective rents is expected in other sectors of activity, which were heavily affected by the new epidemic, including restaurant-cafes, entertainment and retail trade. The turnover of these sectors, even after the end of the lockdown, is expected to be particularly reduced due to the expected decline in both domestic and tourist demand, while a new outbreak of the pandemic, which the experts do not rule out, could lead to a new, partial or full, lockdown of these enterprises. In addition, retail real estate faces the challenge of a rapidly growing online shop sector.
It is pointed out that, as part of the extraordinary measures taken by the Greek government to support pandemic-hit businesses, tenants of commercial properties paid 60% of the agreed rent during the lockdown period. Businesses in these sectors have already called for additional arrangements to facilitate payment of their rents and renegotiation of their leases with a view to a downward adjustment of rents for the next quarters. In some cases, mostly concerning big retail chains, lower rents also result from the practice of linking rent to turnover. This trend is expected to become stronger going forward in the area of commercial rentals. Similar pressures, perhaps more moderate, are expected on prices and rents in the office market, where there is a tendency towards smaller properties and short-term lease contracts with more flexible terms.
As for the logistics segment of the market, while in the short term it faces difficulties due to the restrictions on the transport of products, mainly from abroad, demand for new spaces in the product distribution chain is expected to increase. The expansion of e-commerce will work in favour of this industry by providing new investment opportunities.
The situation is more complex in terms of the effects of the pandemic on the housing market. Priority lending to the productive sector of the economy is likely to crowd out housing credit and, combined with rising unemployment and declining household incomes, reduce domestic demand, at least in the short term, putting pressure on valuations and rents in the housing market. However, once the recent health crisis is behind us and the uncertainties regarding the recurrence of the epidemic have been removed, the Greek housing market is expected to once again emerge as a significant investment opportunity. It will likely be able to provide its investors with attractive valuations and future capital gains and significant returns from acquisition and exploitation of real estate, not to mention the benefits from the Golden Visa programme.
In any event, a correction in real estate valuations due to the current health crisis would actually make the Greek real estate market more attractive, probably across all market segments (retail, logistics, offices, residential, etc.). Long-term investors should remain or gradually rebuild their positions in the Greek real estate market, taking advantage of the possible pressure on prices and any investment opportunities that arise. Experience from the recent pandemic is expected to increasingly lead wealthy private investors to reconsider their investment strategies and, above all, to seek options for shielding themselves and their families against future economic and health crises. In this context, countries with attractive Golden Visa programmes and successful anti-epidemic policies will be the focus of investor interest; Greece, in particular, is well-placed to benefit from this trend.