Agreements for the purchase and sale of investment properties are “lacking”, as the maintenance of prices at high levels and the reluctance of sellers to adapt them to today’s high interest rates are forcing real estate investment companies (AEEAP) to revise their investment strategy. In addition to the high cost of borrowing, which has increased risk, the rise in interest rates has resulted in the real estate to be called upon to compete with other investment categories, whose yields have increased. Thus, returns of the order of 4%-5% are now difficult to consider sufficient, especially for AEEAP, which are required to offer a high dividend yield to their shareholders.
This data has already begun to translate into a lack of transactions in the income real estate market, as almost all AEEAPs now avoid buying real estate from third parties and turn to other forms of investment. In her recent analysis, the Proprius, a real estate advisory services firm, said today’s returns are “theoretical, as no significant volume of income property sales took place during the third quarter. The largest deal involved the acquisition of three buildings, amounting to 180 million euros, by her group National Bankwhich will be completed by the end of the year”.
Therefore, the managements of AEEAP have set as their priority the development of the existing properties in their portfolio, as this strategy offers multiple benefits and clearly higher returns. The most important advantage is the possibility of financing 40%-50% of each investment with the Recovery Fund loans, which is almost zero interest (0.5%). At the same time, through real estate development, AEEAP also reaps the profit that the property development company would have if it bought e.g. a newly built income property from a third party. Thus, it is possible to increase the return on investment.
In practice, with the funds of the Recovery Fund, the risk of high interest rates is eliminated and the overall financial cost is significantly reduced, allowing higher profits for the companies that proceed with such contracts. It is already estimated that real estate projects totaling more than 1 billion euros have been or are going to be included in the Recovery Fund, not only by the AEEAP, but also by real estate development companies. It is reminded that the Recovery Fund finances only the parts of the property that contribute to reducing its environmental footprintwhile buildings located in areas with lower economic development (e.g. in region) are financed with a higher percentage compared to e.g. with Attica.
Rising interest rates have boosted returns on various investment options that compete with AEEAPs.
For example, the Demand already secured a loan of 60.8 million euros from the Recovery Fund for the partial financing of the redevelopment investment of the former Athens Paper Mill property in Botanikos. It is a project with a total amount of 150 million euros, which focuses on the formation of a complex of green office buildings. Accordingly, the group’s Noval Property joint venture Biochalco and investment firm Brook Lane Capital secured a Recovery Fund loan covering 40% of the required funds for the development of The Grid office complex on the former Kodak property in Maroussi. The estimated construction cost will exceed 50 million euros.
As it seems, in fact, no differentiation of the existing data in the real estate market is expected, at least until the end of the first half of 2024, when it is estimated that the easing of the monetary policy by the ECB will begin and obviously the data will be re-evaluated by the investment companies real estate. In the meantime, it does not seem that there will be any particular change in the market, as, as predicted by Alpha Finance in its recent analysis of the AEEAP industry, income property prices will continue to move upwards.
Specifically, an increase of 3.2% is predicted for 2023, while for 2024 it will be 3.1% and in 2025 3%. This implies keeping yields at a low level, even though the rents have grown. According to Alpha Finance’s analysis, compared to ten years ago, when the crisis was at its peak and values had fallen, the returns of income properties were very different. In particular, the average yield of an office building then ranged between 8% and 10%, compared to 5.8% today. In the logistics category, which is also particularly popular today, the average yield is now 6.8%, from 12%-14% ten years ago. Of course, compared to other markets in Europe, the current returns offered by the Greek real estate market are among the highest.
