Could Real Estate Investments in Dire Financial Times Turn From High-Risk Ideas to No-Brainers?
Over the last seven years, Greece has been under an austerity restructuring program, receiving extended aid from European financial institutions and international creditors in an attempt to tackle its overly high deficits and incessant market stagnation. This year did not get off to a flying start for financial markets, and in particular the Greek real estate market, which – following a long period of significant contraction – remains subdued and of uncertain outlook.
The question that pops up is when is the right time to invest. All investors – both seasoned and novice – wish for the ability to master the market’s intricacies and perfectly predict market swings when formulating their strategies. Sadly, however, most of the markets are governed by random action, making it practically impossible for investors to build and develop investment projects on the basis of current market yields. Things seem to be even more complicated when investors are called to invest in times of financial meltdowns and inevitable crashes.
Let’s zoom in on the Greek commercial real estate market. In a nutshell, a slowing economy, tight credit standards, and liquidity shortages have curtailed real estate activity, leading to business bankruptcy, higher vacancies, and investment reluctance. In addition, business activities and investment interest appear to have been further severely affected by the adverse and volatile legal framework regulating real property tax. Real estate taxation has been a thorny issue for Greek government, lenders, and investors alike, with the government insisting on higher taxes across the board and planning to increase the rates of ENFIA – the tax levied annually on property located in Greece on the basis of specific coefficients (e.g., size, location, zone price, surface, age, and use).
On the good news side, the Greek real estate sector has not ceased to offer a wide range of property investment opportunities, including prime commercial properties, real estate development projects, vacant units, and unused commercial premises, along with secondary retail, warehouses, and non-prime office buildings, frequently featuring investor-friendly assets such as soundness of location, current and future infrastructure initiatives, optimal urban planning, and migration patterns. Unfortunately, while investors would theoretically want to get their hands on such real properties, Greece’s current overextension and inability to make good on its debts hold them back – or at least this seems to apply to the conservative investing approach.
However, aggressive investors generally agree that when times are bleak, that is the time to invest. Accepting a relatively high degree of risk and always being prone to whipsaw actions, they aspire to draw trend lines allowing low entry points in hopes that they will come out on top in the mid-term. From a Greek market point of view, safety-sensitive strategies usually turn in favor of the investors when they are built as time-tested techniques – i.e., investing a set amount of money on a certain asset for a specific time frame. Thanks to the current depressed prices, the Greek real estate market appears to be open to such techniques, favoring investments that – despite the high risk involved – may easily turn out to be safe bets. The number of international investors already testing an aggressive approach in the Greek territory, such as Fairfax Holdings and – most recently – Landis+Gyr, would appear to confirm this analysis.
An attempt at a reality check would confirm that prime real estate prices are currently relatively low, indicating only a slight chance of minimization in the immediate future and, therefore, any ups and downs in the market will cause little harm in overall investments. However, a potential risk that needs to be assessed prior to any investment decision involves the real estate taxation developments. The upcoming few months will indicate whether the government is planning to stick with the current property taxation system or whether everything will change again for property owners and potential investors. Until then, investors will have enough time to determine whether the current dire economic straits call for strong intuition or solid risk assessment strategies.
By Panagiotis Drakopoulos, Senior Partner, and Mariliza Kyparissi, Senior Asssociate, Drakopoulos Law Firm
This Article was originally published in Issue 3.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
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