Commercial real estate is faltering under a heavy hit from interest rates

Market participants see no new deals on the horizon as price increases of more than 30% since 2017 have reduced yields and after ten consecutive ECB rate hikes put them under severe pressure.

The Greek commercial real estate market has entered a new and difficult phase after several years of continuous price increases that have reduced yields and after ten ECB rate hikes brought them to record levels. According to the industry, the era of intense movement is now giving way to a period where deals have now 'dried up'. Significantly, the leading real estate conference, Prodexpo 2023, which was successfully held last week, was all but one thing: speeches about new deals and investment movements in commercial real estate.''In a packed Philharmonic Hall, industry leaders actively participated in a series of discussions on the sector's progress in recent years. Government officials, CEOs and analysts spoke for two days, discussing supply and demand, foreign investors, and existing projects. But there was no discussion of new entry projects into the pipelines. That is, deals that will continue the positive trend in the market. At the event, statements about the state of the commercial real estate market were particularly cautious. But in private discussions market participants speak more frankly and treat the situation of "freezing", which is the first time in several years.

Although the Greek market is showing resilience to decline''commercial real estate abroad, the latest European Central Bank rate hike, the tenth in a row and with an accumulated increase of 4.25%, seems to be a serious test of market resilience. Combined with rising real estate prices, yields are falling and investor interest in new projects is waning. "The numbers are no longer consistent," says the CEO of a well-known real estatedeveloper. - "Right now we are closing a deal with US investors for offices, and then I don't know what will happen.

The real estate investment equation has changed dramatically over the past year.

Commercial real estate in Greece is still more affordable than in other''European countries, but prices have already reached levels where net profits have been significantly reduced. According to the Bank of Greece, the office price index has risen consistently since the beginning of 2017. In Athens, prices rose by more than 10% in 2022. From the first half of 2017, which was the lowest point during the economic crisis, office prices across the country rose by 31.4% by the end of the second half of 2022 and are now at their highest levels since 2011. Consequently, yields in Greece, which is a big advantage for the country, are significantly decreasing while they are increasing in Europe.

The biggest changes are taking place in the logistics segment, as data from the National Stock Exchange shows. In second-quarter warehouse yields, it''decreased in Greece from 7.5% to 7%, while in Europe it increased from 4.48% to 5.04% over the same period. A similar situation can be observed in store yields, while in offices the market links with foreign countries are changing, despite the strong demand for green facilities. In particular, yields in Athens remain unchanged at around 6.5%, but have risen to 4.65% in Europe in the second quarter of 2023 from 3.79% in the third quarter of 2021, which is of course due to the large drop in prices.

Banks remain thrifty

At the same time, Greek banks are now quite frugal when financing commercial real estate, following the trend in the eurozone. Moreover, according to data published in a recent S&P Global analysis, Greek banks have the second-largest exposure to''the emergence of new geopolitical risk issues caused by war in the Middle East.

As Germany slips into recession, fewer European companies are expanding and looking for a foothold in Greece, and in times of crisis many foreign investors prefer to return to safe havens and major markets where prices have corrected. "We are entering a difficult path with many sharp ups and downs," market participants added.