10 Jul Greece will continue to be a dynamic real estate market
George Kormas, CEO, Piraeus Real Estate, considers the impact COVID-19 will have on the Greek real estate sector
This interview took place at the end of April, when Greece was under lockdown restrictions to limit the spread of COVID-19 and reflects Mr. Kormas’ views at that time. He also gave us a fascinating interview earlier in the year, where he described the operations of Piraeus Real Estate, which is part of Piraeus Bank Group and services Greece’s largest real estate portfolio. You can read that interview here.
Greece has drawn global praise for its effective handling of the coronavirus crisis. In what ways will the boost in its reputation pay off in the short to mid term?
At a very early stage of this health crisis, Greece approached it in the smartest and most morally responsible way: the Greek government promptly assembled a team of experts and then unconditionally cooperated with them according to a carefully created prioritization list. The first priority was to limit the cost in human lives and this could be achieved by avoiding stressing the healthcare system of the country. It was not time for politics, it was time to listen to the healthcare professionals and provide them with the tools to battle the virus. For me, it was unbelievable to hear from some world leaders that it was difficult to choose between human lives and the economic difficulties of lockdowns in order to prevent the contagion. In Greece, we did not engage in this debate being clear from the beginning about the self-proven value of human life. Thus, we minimized the confirmed cases and suffered one of the lowest fatality rates worldwide.
This approach will prove to be a win-win situation, since it will also produce economic results. The International Monetary Fund forecasts that the Greek economy will contract by 10 percent this year as a result of the pandemic. I am leaning toward the Bank of Greece governor’s estimation of a 4 percent contraction. My prediction is that the recovery will be fast after the battle with the virus is won, probably at the end of Q2, and Greece has successfully confronted the health crisis, maintaining some social distancing measures. On the opposite end of the scale, our neighboring countries and rival tourism destinations such as Spain, Italy and Turkey, are counting a large number of deaths following their late acceptance that a lockdown of some degree was unavoidable. This reputational advantage will guide, and I agree with the Greek government on this, to the fact that any spike in debt and deficit will be temporary, so we will face a sharp upturn in the Greek economy.
What are the main lessons to be learned from the coronavirus crisis, for humanity, personally and for the company you represent?
As a business leader, and not a doctor, I have to say that we can take some useful lessons from this health crisis. First, we must understand that this is a threat to humanity as a whole and prepare ourselves for more of this kind of globally concerning issues, especially since this virus may reappear in the autumn. We have to find ways to steadily gather and provide real-time data to the experts, to analyze situations like this and stop them before they spread. Accordingly, during the lockdown of our country Piraeus Real Estate was supported by our thoroughly prepared Business Continuity Plan (BCP) and mostly relied on modern technology and our employees’ sense of responsibility and commitment.
Second, we have to reexamine our healthcare systems and fix any structural inefficiencies. Europe has to be the leader in this cause, as it is the area with the utmost respect for human life in the world. My strong belief is that the necessity for heroes, like our healthcare staff, exposed inadequacies that have to be rectified. I run my organization like this. I do not want employees at any level to undertake enormous workloads or be responsible for multiple projects. If this happens, either the outcome of their work or their personal life will suffer, meaning that I have not delegated responsibilities and thus completed my job correctly. Even though every leader loves to work with his A players, he must thoughtfully assign tasks with consideration that they are humans too.
Another lesson is to create teams and rely on them. Just like medicines for COVID-19 or even the vaccine will be created by teams of people working together, exchanging knowledge and data, and sharing a common cause, I rely on my management team to reach the companies objectives.
Personally, the most important lesson is that in troublesome times you have to stick to your values. During the late economic crisis in Greece, my values as a businessman were put to the test a number of times and, even if short-term profit at times attempted to steer me away from my values, they were my long-term guidance for overcoming any obstacle. And my main value as a leader is to always protect my team members—even at my personal cost. I feel responsible for and proud of them, and almost always I get repaid with their hard work, loyalty and respect.
We know that COVID-19 will dramatically affect the global economy. What will be the short-term and long-term impact on the real estate industry from COVID-19 and how this can be mitigated or even overturned?
A shut down of two to three months is not going to have a major impact on assets’ prices. And though the exact measurement of the impact on the real estate market from the pandemic and the prediction on the duration of the crisis are impossible at this time, we can make some estimates on the potential constitutional change to real estate and its economics. As real estate experts, we know that real estate is an economic system of its own that interacts with the broad economy. By which I mean that in an economic system, when an unexpected shock is enforced, some sectors are improving while others are deteriorating.
In this system, through the coronavirus crisis we see a projection in the future on lower demand for office and retail space due to increased use of teleworking and e-commerce respectively. In other words, this crisis resulted, for example, in a substantial number of people trying online shopping for the first time—just as a large number of people started using plastic money in Greece due to the capital controls enforced during 2015 and continued to use it after acquiring relevant familiarity. Human history is full of this kind of “violent” adaptations to new realities enforced by momentous, positive or, as we are facing with COVID-19, negative events. On the other hand, due to lower interest rates and some decrease in assets’ prices, we will see a definite increase in the residential sector. After all, in this crisis the real estate industry is the only one that is advertised daily with the “stay home” message. Of course, I have to say that I do not think that teleworking will harm the office sector to the same level as encouraged penetration of e-commerce will on retail. Studies of the past have shown that productivity in traditional office spaces cannot be compared to that of teleworking.
At the time of this interview, the end of April 2020, we are in the beginning of the pandemic in Greece. There is a lockdown, with the Greek government imposing social isolation and strict restrictions on all nonessential transport and movement across the country. Although I cannot imagine the real estate industry operating in the long term without site visits, face-to-face meetings and personal contact with our potential customers, Piraeus Real Estate, by deploying its timely prepared business continuity plan, remains fully operational, continuing to offer its services to its customers by exploiting the advantages that modern technology offers, through teleworking, conference calls and video conferences. Our innovative e-auction platform Properties4Sale is also fully effective and should these restrictions remain for a long period of time, we have prepared a plan to mitigate the consequences by offering pre-filmed video walkthroughs or FaceTime tours on significant assets, according to a prioritization of our large and diverse portfolio.
In 2019, a significant portion of demand for residential realty in Greece came from international buyers, with the net inflow of capital from foreign investors recorded by the Bank of Greece at €1.5 billion, up 28.5 percent from 2018. How big is the correlation between residential real estate and tourism in Greece? What is your assessment of the impact that the current fall in tourism will have on the real estate sector?
We reached a total of net foreign direct investment for real estate of €1,450 million for 2019, from €1,128 million for 2018. What is more impressive is the fact that for 2017 this figure was €415 million, an increase of 172.1 percent, and for 2016 it was €222 million. Tourism is the main reason for this extraordinary increase in demand for Greek real estate, as it is its main promotional instrument. The lockdown of the country, due to the COVID-19 situation, paused any touristic activity. Due to the methodical handling of the health crisis and the unrestricted compliance by the government and the Greek people with the health care experts’ escalating instructions, Greece has managed to be among the top COVID-19 secured destinations on the planet. We expect this to be a competitive advantage for the country.
In terms of short-term benefits, after the end of the lockdown we will face increased tourist arrivals that otherwise would prefer the competitive Mediterranean destinations such as Spain and Italy or cheaper ones like Turkey. In the long run, in realty we foresee potential buyers of cottages, associated with Greece’s Golden Visa, or small residencies for investment purposes, related to Airbnb, that will decide to “ride the wave” of the most COVID-19-free country, that combines the weather and the landscape of the Mediterranean sea.
Of course, we expect cross-border investments to decrease more than deals coming from national buyers, since most foreign investors are expected to delay their not-finalized agreements until Europe is open. For domestic investors, this will be an opportunity to operate in a less competitive environment and achieve transactions far more profitably.
Although the predictions are that it will take up to three years for Greek tourism to reach the levels of 2019, I believe that during 2021 it will boom. Tourists will come back. They always do. And some of them will want to acquire their dream house in our wonderful country, either in Athens with a view to the historic Acropolis or on an island with a view to the Aegean Sea.
At the regional level in Greece, how would you characterize the behavior of the markets beyond greater Athens and the islands at this current stage? Do you foresee much price fluctuation for the remainder of 2020?
Even before the health crisis, I was one of the few real estate professionals referring to the recent years’ disproportionate increase in prices of assets between the high-level destinations like the historic triangle of Athens, the Athenian Riviera and the high-end touristic destinations such as Mykonos and Santorini, with the lower demand areas. The difference in the demand, and consequently the prices, was enormous and Piraeus Real Estate, as a real estate company servicing the largest portfolio in Greece, knew it at first-hand. After the pandemic, differences in valuations will certainly be reinforced between prime and secondary locations, as this pattern has already been observed in past years. These differences will be in terms of rents and vacancies. Bankruptcies as the result of a lack of adapting to the new conditions and their subsequent vacancies will define the landscape of the immediate period after lifting the lockdown.
Prime high streets will remain unharmed by the crisis in the sense of value and production of revenues. The ten-year period of Greek economic recession has proved the dynamism of prime locations and it is more than likely this to be proven once more as, after this crisis, investors will be focused more than ever on them.
On the other hand, we will see sporadic fluctuations to specific sectors due to implementing new social distancing rules. For example, we will see re-pricing to shopping centers’ space for renting public space from coffee shops, bars and restaurants due to the much lower number of seats. Or, we will face an increase in demand and valuations for logistics properties near large cities as an outcome of the boost of e-commerce.
Is there a silver lining to the coronavirus crisis in Greece and, specifically, for the real estate sector?
As we all agree, the damage of this crisis resulted first and foremost on human lives and secondly on the economic downturn for the global economy—it is the next level of discussion about the benefits that it may produce. The main benefit from this crisis—and generally from any crisis—in my opinion is that we will be forced to reassess, rethink and reorganize our ways of approaching and operating in a number of different economic sectors and situations. And, though I am sure that epidemiologists will become much wiser and will be forced to produce better tools along with statistical models for predicting and battling epidemic crises like this, we as economists must find ways to be prepared for the economic results of them.
As humanity, will try to lower the virus’ importance for the sake of the economic importance by partially opening populations’ lockdowns. I guess the main question to be answered is how much of the resultant change is going to be structural and how much will prove to be temporary.
In real estate, we expect to see buyers cancelling or postponing some deals, especially the cross-border ones. Furthermore, we expect to see change in every sector that is correlated with human congestion like offices, hotels and shopping malls. It is to be seen if this change will be offset by the increase in other sectors such as logistics and warehouses that will support the boosted demand of e-commerce, though I seriously doubt it. I do not expect increased vacancy rate in most areas’ prime assets located in the best business districts in sectors such as offices, as the increased demand of recent years is larger than the new supply provided by new development. The appearance of required rent-free periods of tenants in all sectors or the demand for renegotiations of their leasing contracts will be another consequence of the pandemic that may reduce the net revenues of property owners. Increased numbers of bankruptcies may be realized after the end of the crisis, especially for companies operating marginally or in high debt, or many relocations in an attempt to minimize operational cost.
As I mentioned, real estate is a self-sufficient environment. A fragile ecosystem that interrelates with the economy in many ways. It may lose a portion of its value at times, interacting to national, regional or worldwide—as in the recent pandemic—events, but it will always be a reference point as a shelter for people or as a production inflow or an investment vehicle for companies.
Lastly, through this crisis, real estate companies and real estate stakeholders in general will be forced to realize that sustainable responsible investing is not a vague “nice-to-have” concept of the future, but an urgent present-day obligation that must be incorporated in their business models. Nonetheless, I like to believe that through this crisis we are being given an opportunity to rethink the traditional real estate framework and introduce a healthier, more energy-efficient approach.
Piraeus Bank Group and I personally are committed to responsible investment, meaning the implementation of environmental, social and governance (ESG) issues into investment decisions. We must decide to contribute to a sustainable global financial system by encouraging the adoption of the Six Principles of ESG and collaboration on their implementation. This is translated into analyzing, for example, the environmental footprints of the properties the group is offered before accepting them as loan collaterals. This approach is economically efficient, as global researchers have shown that there is a positive association between responsible investing and financial performance.