Somewhat surprisingly for most analysts, the real estate market registered a remarkable “decoupling” from economic activity during 2020. In retrospect, the real estate market reacted much like any other financial market last year. After an initial shock, most analysts realized that Covid-19 recession was going to be a transitory phenomenon and economic activity would, sooner rather than later, return to its previous trajectory. Hence, in the stock market analysts and brokers stopped using 12-month forward Earnings per Share(EPS) to value stocks. Instead they switched to using 24 month forward EPS in their valuation models to estimate the “fair value” of equities. The same reasoning was also applied to the real estate market. Market participants, by and large, side-stepped the 2020 decline in GDP and disposable income and based their valuations on their assessment of the long-term potential growth of the Greek real estate market. That valuation approach has had three direct implications:
- First, given the positive outlook for the Greek real estate market, which is based partly on our “goldilocks” outlook and partly on structural reforms (such as “golden visa” and tax-base transfer for wealthy individuals) which aim on making the Greek real estate market more attractive to foreign investors, Greek real estate prices for both commercial and residential properties kept growing despite the decline in incomes and economic activity.
- Furthermore, given the extremely positive prospects of the Greek economy, we project that the Greek real estate price indices (residential and commercial) can keep growing to the tune of 6% in the near future until they settle down to a less scorching – yet fully respectable – pace of 3% p.a. in the long-run.
- Yet, the combination of the unavoidable decline in domestic incomes (especially on the corporate sector) with the robust real estate price acceleration means that temporarily, valuation metrics such as the affordability ratio will look elevated. Strong economic growth following the post-Covid return to normalcy will ameliorate this brief valuation bump.
Overall , looking at the big picture, we anticipate that- starting from a low base- the Greek real estate market can grow hand-in-hand with a robust economy for a number of years. Under that scenario, Greek real estate prices could converge to our estimate of “fair” or “equilibrium” level no sooner than 2027.