Greek Property Market Analysis :Construction activity slows down, real estate prices Rise
The Greek economy has been boosted in recent years by the steady rise of the construction sector and the real estate market as a whole.
With Foreign Direct Investment (FDI) related to real estate in Greece, having exceeded 2 billion euros in 2022-2023, compared to an average of 0.4 billion euros in the previous decade, and with the number of new building permits rising continuously, it is undeniable proof that the Greek real estate market is among the top choices of buyers and investors in Europe after many years.
Foreign Direct Investment is very important for the economy. According to the BoE, “Foreign direct investment (FDI) reflects the intention of an entity resident in one economy (direct investor) to acquire a lasting interest in an enterprise resident in another economy (direct investment enterprise)”. The long-term duration of real estate-related FDI, combined with the inflow of foreign capital related to FDI, are key components of the qualitative and healthy participation of the real estate market in the development of our country’s economy.
FDI, together with domestic real estate investment, has created a dynamic growth environment that creates turnover in hundreds of professions and directly or indirectly hundreds of thousands of jobs in many sectors across the country, forming a foundation for the economic restructuring and development of our country.
Thousands of SMEs and professionals are active in the Construction sector, the number of which has increased in recent years, reversing the downward trend that occurred during the economic crisis. In particular, in the Construction sector (according to a study by IOBE), approximately 70,000 enterprises were active in 2022, an increase of 7,861 (+13%) compared to 2017.
In Architects and Engineers activities, about 52,000 firms operated in 2022, almost 4,300 more compared to 2017.
However, it is worth noting that the majority of these businesses are self-employed. The output value of Construction, after a decade of low activity and disinvestment, has strengthened significantly, with a parallel improvement in operating profitability and the sector’s contribution to the Greek economy. The total production value of the Construction sector is estimated to reach EUR 12.8 billion in 2023, a level 84% higher compared to 2017. The gross value added (GVA) of the sector was 3.4 billion euros in 2022 and its contribution to the total gross value added of the Greek economy was 1.9%. The operating surplus and gross income of the Construction sector followed a steady recovery path after 2017 and amounted to €1.5 billion in 2022 (14.1% of total production value), still significantly below the values recorded in the 2000s (average 25% of total production value). Since 2019, the production value in the Architectural and Engineering activities has strengthened significantly and is estimated (at current prices) to reach EUR 4.2 billion in 2023. About 50% of the production value is the value added of the Architects and Engineers sector, which in 2022 amounted to 1.7 billion euros, representing 0.9% of the country’s GDP.
The construction sector plays an important role in the fight against unemployment as its growth is directly linked to the growth of the labour force in hundreds of occupations. Labour shortages are seen as the main obstacle to growth in the coming years. The prospect of strong further development of domestic construction activity will create additional needs for labour of various skills.
According to the estimates of the IOBE study, the total number of employees in Construction, if the upward trend in the sector continues, should increase in the period 2024-2026 to about 250 thousand workers, a level that is 51 to 55 thousand workers higher compared to the total employment in Construction in 2022 (197 thousand workers) (Chart). If we also take into account those directly employed in commercial enterprises and services related to the construction sector, the numbers are several times higher.
The development of the real estate market also strengthens the economic power of the country as real estate is traditionally one of the most important asset classes. When the real estate market is on the rise, land values go up as well as the values of newly built properties, while the values of old properties are also drifting up, boosting returns, creating surplus value proportionally to all social groups – property owners.
Offering a unique product geographically, combined with huge infrastructure projects, Greece has unique options to offer to investors and buyers from all over the world. It is obvious that this does not apply to the entire Greek territory and that there is a substantial grading and segmentation of the market based on the characteristics that each area and each property has to offer.
According to the Bank of Greece, in 2023 and the first months of 2024, property prices continued to rise at a high rate, especially in the higher end of the market. The housing market saw the largest price increases, with demand for investment use remaining at high levels and the supply of quality or new stock being limited, as the BoE points out in its Monetary Policy Report released a few days ago.
The price trend remains upward in the aforementioned areas, where strong demand from abroad, and increased construction and borrowing costs are shaping price levels disproportionate to disposable income, making it difficult to acquire a first home and pushing up both subordinate housing prices and rents.
In the housing market, according to the apartment price indices published by the Bank of Greece, the upward trend in prices continued during the first quarter of 2024 with high annual growth rates.
More specifically, according to the estimates data collected from credit institutions, in the first quarter of 2024, nominal apartment prices were up by 10.4% annually (provisional data), while for the whole of 2023, based on revised data, apartment prices increased significantly, with an average annual rate of 13.8%. House prices are just 4.1% below the historic high recorded before the fiscal crisis (third quarter of 2008), and compared to the low recorded in the third quarter of 2017, prices are up 66.4%.
As stated in the Monetary Policy Report of the BoE, with expectations for the Greek real estate market remaining positive and driven by tourism, improving infrastructure and the gradual renewal of the building stock, it is estimated that the upward price trend will continue. However, broader geopolitical instability, rising inflation and high construction costs, combined with deteriorating household purchasing power and limited bank lending, are major factors of uncertainty.
Moreover, constant changes in legislation and taxation are estimated to have a negative impact on investment and construction activity at a time when demand is not being matched by supply and values, especially of housing, are rising at rates significantly higher than household disposable income.
The consequences of the dispute between the municipalities and the Ministry of Environment that has arisen from the provisions of the New Building Code (NOC) are beginning to become apparent in the construction activity, raising serious concerns. Since May, there have been strong signs of decline in the construction sector, which are now reflected in the official data of the Hellenic Statistical Authority (ELSTAT). Considering the fact that the strong reactions from municipalities have continued with particular intensity from June until today, greater repercussions on the development of the construction sector and real estate are expected, with all that this implies for unemployment and the economy as a whole.
Specifically, according to ELSTAT, data show that construction activity has slowed down, with the issuance of new building permits falling significantly. This development was to be expected as the intense dispute between the municipalities and the Ministry of Environmental Protection created an environment of uncertainty for both building investors, builders and buyers. With the NOC being challenged by many municipal authorities almost in its entirety, in terms of energy incentives, with permits that have been legally issued being in the air following court decisions, and with the lack of a specific legal framework for architects to work with, Engineers, urban planners and investors, it was expected that all stakeholders would sooner or later freeze new projects in anticipation of developments in the issues concerning the challenge to provisions of the NOC but especially the decision of the plenary session of the CoE. Many municipalities have already suspended the issuance of building permits that make use of the beneficial provisions of the NOC, adding to the uncertainty in the market.
The deterioration in construction activity comes at a time when the need for new housing is urgent, especially in areas of high demand and high property prices. Instead of accelerating the process of building new housing units, the confusion surrounding the NOC has led to a slowdown, depriving the market of new housing and exacerbating price pressures.
According to this May’s data, there has been a significant drop in the issuance of new building permits, particularly in Attica, where declines reached 12.1% compared to last May. This translates into 15.9% less surface area and 21.5% less building volume. This trend is all the more worrying when one considers that the Attica region is one of the most densely populated and in great need of new construction, and the problems seem to be having a particularly serious impact here.
Similar falls are also recorded in other large urban centres, such as Thessaloniki and Crete. In Thessaloniki, building permits fell by 16.9%, while the decrease in surface area reached 21.6% and in volume 29.3%. In Crete, the situation is even worse with reductions of 29.5% in the number of permits, 35.7% in surface area and 33% in volume.
These developments come to further exacerbate the already existing challenges in the housing market, where the supply of new homes is already limited, leading to increases in sales and rental prices.
The construction industry is operating with a necessary ‘time lag’. When the flow of construction activity comes to an abrupt halt, it takes time to restart it if and when conditions are once again favourable. It takes at least 12-18 months for a new building project to be selected, designed, matured, licensed and started. This means that given that construction activity has been stalling since May, unless an immediate solution is found, it will not resume before Spring 2026 and provided the market remains attractive.
It is characteristic and regrettable that all this happened at a time when the construction sector was experiencing impressive growth. According to ELSTAT data, there was a 42% increase in building permits in the first quarter of 2024. In March, the number of building permits increased by 39.6% year-on-year, while the area and volume of construction increased by 37.7% and 13.1% respectively, compared to March 2023. Immediately after the start of the municipalities’ dispute with the Ministry of Environmental Protection, a sharp decline followed across Greece in May. Given that this decline is expected to be reflected in the statistics in the coming months, the Greek market and economy may soon face major challenges.
The rule of supply and demand is absolute. The freeze in construction activity will lead to a further increase in both selling prices and rents, creating an even bigger problem for the average Greek family. At the same time, thousands of jobs are bound to be lost during this period, while thousands of businesses involved in the sector will also be affected. The need for an immediate solution to the problems associated with the NOC and the restoration of confidence in the construction industry is now more urgent than ever.
Konstantinos Kioleoglou,
Kioleoglou Kosta – REV , is a Civil Engineer holding an Meng from N.T.U.A. and a MSc in Real Estate Investment and Finance, Heriot Watt University. He is a Recognised Expert Property Valuer & European Valuer, by Tegova –
Writter of the book ”
Columnist for skai.gr
Director – Avakon Real Estate Development
Source |Skai.gr