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Greek offices go way of ancient ruins as ailing economy hinders development

Office stock in Greece is failing to meet the needs of the country's businesses following almost a decade of stalled development that has seen builders struggle to secure funding for new projects, with many going bust, according to local industry analysts.

Greece's real estate sector has been devastated by the most severe economic downturn suffered by any European country in the wake of the global financial crisis, with GDP estimated to have fallen by about 25% between 2008 and 2015. Since 2010, the country has required three bailouts totaling €326 billion from the European Union's European Stability Mechanism to keep its economy afloat.

The economic turmoil saw the loss of construction investments worth approximately €18 billion, or 8.2% of GDP, between 2008 and 2015, according to a 2016 Greek real estate market report by PwC. This collapse in investment has left much of the country's office assets, in particular, unfit for purpose.

"We have a gap in new and good-quality office space," Yannis Perrotis, CBRE Atria & Atria Group head, told S&P Global Market Intelligence. "The technology of the best office buildings around, in the vast majority, is totally insufficient. The developers who were producing office space in Greece are, in the majority, out of business or they are in a state where they cannot produce more. The banks are not giving any finance."

According to Perrotis, only two office projects were built in Athens, Greece's capital city and largest market, in the last 10 years. An analysis of SNL-covered real estate companies operating in Greece, including the country's largest real estate investment company, Grivalia Properties REIC, shows that none has any assets under construction in the country — offices or otherwise. Of the 12 projects in pre-construction that the companies have on their books, seven were acquired prior to the 2008 crisis and have failed to make any progress since, the data shows.

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The lack of development activity, particularly in the office market, is becoming a problem for many tenants stuck in aging buildings. "The existing stock is getting old with increased fit-out costs for occupiers," according to a Greece Office Market Snapshot for the first quarter of 2017 by global real estate services firm Cushman & Wakefield.

Still, there are beneficiaries of the deteriorating condition of older stock — prime office rents in parts of Athens have experienced increases of up to 22.2% over the last year, the Cushman & Wakefield report noted. "[The increased demand is] not because we have new entries [in the Greek market] but because we have existing companies that want to relocate and achieve affordable rental rates in core class-A properties," Katerina Dimou, director of investment and office services at Colliers International Greece, said in an interview.

Taxation imposed on the cost of new projects is compounding the tough economic conditions already discouraging new development, Perrotis said. Buyers of new developments are charged a value-added tax of 24% on the total cost of a project, which includes the cost of the land on which the asset is built, rather than just the building itself. This "additional charge makes transacting very, very difficult," said Perrotis.

Greece's development pipeline is unlikely to be revived unless this and other restrictive regulations are revoked or amended, Perrotis added. "There are a series of measures that have been taken in the market that have made many historical [financial arrangements] so unworkable [and] that make developing practically impossible," he said.

Investors have focused instead on existing office assets, with Greek REICs continuing acquisition activity into the first quarter of 2017, according to the Cushman & Wakefield report. Grivalia executed the largest deal, worth €13.2 million, for a 50% stake in a mixed-use property in Athens, almost half of which comprises office space. Other smaller deals were completed by ICI REIC, Pireos Bank and Trastor REIC.

If new office development is to get back underway in Greece, developers will "have to do it on equity," Perrotis said, due to restrictions on banks lending to the real estate sector. The lack of appeal of equity funding compared to debt, along with preconceptions of the Greek market by foreign investors, make new development unlikely in the near future, he said.

"Equity players are not realizing that the crisis in Greece was never a building crisis; it was not an oversupply crisis. It was an under-demand crisis plus a financial adjustment crisis. All of this has led to zero supply of offices," said Perrotis.

Finance ministers from the eurozone are set to meet in Luxembourg on June 15 to discuss recommencing loan payments to Greece. These were suspended due to disagreements over the strength of Greece's efforts to address its debt problem.

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