Greek real estate market development and institutional integration

Real Estate in Greece

The work of Costa Siomopoulos entitled: "Fast Growth for Greek Real Estate" state that over the past few years that there has been integration of real estate management, development and exploitation in Greece as social security funds, property and construction companies. Leasing firms, portfolio investment firms, foreign institutional investors, realtors, property valuers and others. (nd, paraphrased) Historically in Greece, property market growth is stated to have been "almost exclusively linked with self-financing and antiparochi ( a quid pro quo transaction, in which the owner of land exchanges it for space in the apartment or commercial block constructed on it." (Siomopoulos, nd)

It is stated to have been these practices that resulted in "chaotic construction and Athens and other Green cities during the post-war period, on the basis of the law on condominium ownership and the substantial increase of floor-area ratios." (Siomopoulos, nd) This was viewed as safe money placement in the past in Greece instead of being viewed "aw an actual investment." (Siomopoulos, nd) Contractors shaped the market post-war through selection of construction location and direction of home buyers and ultimately affecting the development in residential sections of each city. (Siomopoulos, nd, paraphrased) Contractors are stated to have acted as real estate brokers as well mediating in property transactions. Construction in Greece is stated to comprise approximately "…5% of the GDP and 25% of total private investment." (Siomopoulos, nd) Property is the most important of all assets in Greece and is stated to represent the largest financial investment that households make. The Greeks have an intimate relationship with their home according to Siomopoulos and this is stated to be clearly evident by the fact that home ownership is 97% in rural areas and 80% for the total population in Greece. Recent initiatives are stated to include the "introduction of Value Added Tax on new-builds, and the gradual replacement of the property transfer tax with the capital gains tax: initiatives that promote the rationalization of the property market." (Siomopoulos, nd) However, it is related that the government has made other moves with their eye on the real property market other than those which are tax regime related. The Public-Private Partnerships (PPPs) which are stated to be designed to "cover the housing needs of the Public Administration, the development of new financing instruments by the State, such as sale and lease back, and the promotion of a National Land Use Plan." (Siomopoulos, nd)

I. The FACTORS THAT INFLUENCE the SUPPLY and DEMAND of ESTATE

Noted as factors that boost demand for commercial real estate in the Greek market are the "changes in the attitude of Greek consumers, the evolution of the market and its alignment with other European markets, the expansion of existing chains and the entry of new ones in the Greek market…" (Siomopoulos, nd) There are presently more than 20 shopping centers that are organized as such operating currently throughout Greece "either in the form of Malls, or in the form of multi-stores or multiple purpose areas, while 12 more are due to start operating within the next three years." (Siomopoulos, nd) This fact is stated to indicate "the continuous growth of demand from retailers, entrepreneurs and professionals involve din the fields of entertainment and catering…" (Siomopoulos, nd)

There is further a demand for logistics space stated to be "rapidly increasing with the advent of new international retail chains from the multi-store, electronics and electrical appliance fields which are already being established in Greece." (Siomopoulos, nd) Greek office space is stated to be "characterized by equilibrium between supply and demand and price stability while interest is focused on premium properties." (Siomopoulos, nd) When it comes to office space it is stated that "users are more sensitive to price, than location…" (Siomopoulos, nd)

Demand for office space is for the most part "generated by insurance firms, pharmaceutical companies and financial institutions" as well as from ship-owning families and institutions. Demand for holiday homes in Greece are expected to rise in the future according to studies conducted by European tourist organizations as "a large number of Europeans, mainly pensioners, are potential buyers of holiday homes in Greece. However, it is stated that Greece needs to improve the investment climate and problems needing immediate solution include the "…institutional and taxation regimes, market transparency, the bureaucracy involved in issues related to archaeological and forest inspection services, as well as the creation of the National Land Use Plan and the sub-plans that will clarify land use and zoning issues." (Siomopoulos, nd)

II. STEPS of the REALIZATION of a PURCHASE

Real estate in Greece is primarily governed by the provisions set forth in the Greek Civil Code (Astikos Kodikas) regulating property ownership. The types of rights existing in Greece over land (in rem) include those of:

(1) ownership;

(2) real and personal easements; and (3) mortgage.

Failure to register land rights in Greece results in the real estate failing to be conferred to the rightful owner as in Greece "registration is considered as a prerequisite for the lawful conclusion of any real estate transaction." (Article 1198 Civil Code)

The purchasing process of property in Greece is straightforward and is a process that is similar to processes of purchasing in Ireland and the United Kingdom. Steps involved in real estate transactions in Greece include those as follows:

(1) property is selected;

(2) Financing is secured and can be either local or financing from abroad;

(3) an English-speaking solicitor is appointed

(4) Application for Greek Tax Registry Number (AFM) must be completed and can be done by solicitor if time limitations are present;

(5) Local bank account must be opened;

(6) a pre-agreement must be signed that details the terms of the sale and the payment schedule along with a reservation deposit to remove property from the market;

(7) Following completion of all legal work and title searches the individual must return to Greece unless they have alternatively give Power of Attorney to their solicitor to sign on their behalf) to sign the final contract. The final contract is generally signed approximately two to three months following purchase agreement;

(8) Upon completion and at time of final contract signing all fees and taxes are paid. (Zakynthos Services, 2009)

Contracts in Greece at signed as a Notary Office since the notary public is a government-appointed lawyer who processes and certifies all real estate transactions including the following:

(1) drawing up official documents;

(2) reviewing official documents; and (3) ensuring legal transfer of property. (Zakynthos Services, 2009)

When purchasing a property in Greece, the individual will require an accountant since as a non-resident, once a purchase of property has been made in Greece, the accountant is needed to assist with the property declaration in the year of the property purchase and following on the annual tax return to explain the taxation obligations of property owners in Greece. (Zakynthos Services, 2009, paraphrased)

A Tax Registry Number (AFM) or a Greek tax number is mandatory for all those who buy property in Greece and this includes both local and non-local individuals and entities. The local tax office issues the AFM and it is free-of-charge. Applicants are required to present that passport along with personal details and married couples are required to show a copy of their marriage certificate if they will be filing a joint tax return each year.

The solicitor may be granted full Power of Attorney and may then apply to the tax number on behalf of the purchaser of the property. Upon becoming a property owner in Greece the individual must file an E9 tax form along with the basic Income tax form E1. Failure to declare a property will bar transfer of that property later on and further may result in a tax penalty. (Zakynthos Services, 2009, paraphrased)

IV. MARKET STRUCTURE

The work of Cruz (2008) entitled: "Housing Transactions Costs in the OECD" states "In Greece, EU nationals can freely purchase property, while there are few restrictions for non-EU nationals. Acquiring property near national borders and in some islands requires special permission from the Local Council. Such permission is not granted to non-EU nationals." (Cruz, 2008) it is reported that as of June 17, 2008, "the cadastral survey procedure commences in 107 new regions of Attica and Thessaloniki prefectures and the capitals of prefectures that have not been surveyed during previous programs. Citizens who have real estate property in these regions are asked to declare it to the Hellenic Cadastre from June 17th until October 31st 2008, while expatriates and people living permanently abroad can declare their real estate property until December 30th 2008." (the Hellenic National Cadastre, 2008)

The market structure of the Greek real estate market is therefore understood as "The Hellenic National Cadastre" which is characterized by the following:

(1) to definitely secure, without a doubt, the real property of the citizens

(2) to irrevocably adjudicate the state and municipal property, the forests and the coastal zones

(3) to limit bureaucracy and simplify the real property transactions

(4) to improve the protection of the environment by limiting encroachment and unauthorized development of land

(5) to establish an absolutely secure environment for investments in the real estate market. (the Hellenic National Cadastre, 2008)

The previous Mortgage Bureaus system has been transitioning since 1994 to the fully digital Cadastral System. This system was designed "as a parcel-based land information system, serving as a legally recognized record of land ownership." (Dimopoulou, Labropoulos, Nikolaidou, and Zentelis, 2003)

It is reported that the previous Registrations and Mortgages System in Greece "operated under the French-originated system of registrations and mortgages. Each personal record lists all the real property transactions performed by a single person in a given area (person-centered system). The institution of the registrations and mortgages system ensures the publicity of the registrations, but it does not provide legal security of the registered ownership rights. Because the system is organized around the persons, it does not offer the capability of identifying the owner of a particular real property which is observed in the field." (the Hellenic National Cadastre, 2008)

Stated to be problems with the previous system are the problems listed as follows:

(1) the lack of legal titles of a great number of properties;

(2) the government does not know its real estate assets;

(3) the lack of legal security in real estate transactions;

(4) the intense migration from the rural and mountainous areas which caused many properties to be abandoned, forgotten, encroached or disputed

(5) the difficulty to locate land parcels in rural areas; and (6) the existence of customary ownership rights in specific areas of the country. (the Hellenic National Cadastre, 2008)

It is further stated that certificates will be delivered during the first semester of 2008 to those who are real property owners or those who "…have other registrable in the Cadastre rights in the Municipalities in which the cadastral survey has been completed and the Cadastral Office is already operational. These certificates will represent the content of the first inscriptions that have been registered in the respective Cadastral Sheet of each property" so that the completeness and correctness can be attested to and in the case of an error there will be a requirement of submission of an application to correct the error at the competent Cadastral Office. (the Hellenic National Cadastre, 2008)

The work of Lainiotis (2007) entitled: "Important Tax Changes in the Greek Property Market" reports that the Ministry of Finance, as of March 1, 2007 "…implemented an increase in tax values for all real property located in Greece. Prior to March 1st, 2007 tax values for real-estate in Greece did not reflect market/sales values."

Lainiotis reports that the "…differential between tax values and market/sales values ranged from an astonishing 10% to 1,000 +%" which is dependent upon the following factors:

(1) a property's location and (2) whether a property is located within or outside of the planning zone. (Lainiotis, 2007)

Lainiotis reports that this discrepancy in tax and market values "…was predominantly the result of a significant increase in real estate values in the last 8 years." (2007) Lainiotis additionally reports that the plan of the Greek Government to bring about equalization in the tax and market values of real estate is a two-year plan and the Ministry of Finance announced that the lower-upper tax values for the country "…will increase an average 16% for real estate within planning zones while real estate outside of planning zones will increase on average 36% for land and 37% for developed land respectively." (2007) the plan of the Ministry for tax value adjustment will greatly impact the real estate market in Greece according to Lainiotis who states specifically affected will be the following:

(1) Real-Estate Transfer Tax (which will be calculated based upon the adjusted tax value)

(2) Inheritance Tax (which will be calculated based upon the adjusted tax value)

(3) Property Endowment/Gift Tax (which will be calculated based upon the adjusted tax value)

(4) Rental Income Tax (as of 2008)

(5) Legal Expenses for Real Estate Transactions (which is designated as 0.9% of the property tax value for sales and 1.025% for property transfers)

(6) Notary Fees (which range from 0.45%-0.75% of tax values)

(7) Increased Expenditures for Owner Occupied and Renter Occupied Households (the Electrical

(8) Company -- DEH will be recalculating charges for all households based on the new tax values)

(9) Capital Gains Tax- will apply for the first time in Greece:

(10) for Sellers: All property acquired after Jan 1st, 2006 (whether by inheritance, endowment-gift or purchase) if sold within a 3.5-5-year time frame will be taxed 20% upon the difference between the property's tax value from acquisition date to selling date.

(11) for Buyers: In transactions where capital gains tax applies the property transfer tax for buyers will be eliminated (which was 9-11% of the property's tax value), and instead an "exchange fee" will be implemented. This fee will be only 1% of the property's tax value.

(12) First-Time Buyers Tax- in order to assist first time buyers the deductible will be increased to 20% as of March 1st. (Lainiotis, 2007)

Lainiotis states that the Greek Tax Authorities' Adjusted Property Values "…have tremendous implications for real-estate investors, owners, as well as for estate planning" and strongly recommendations that one "…seek well qualified professional assistance for every and all real-estate transactions in Greece." (Lainioti, 2007)

V. FORMATION of an ESTATE'S PRICE

The work of Aspergis and Rezitis entitled: "Housing Prices and Macroeconomic Factors in Greece: Prospects within the EMU" reports a study that analyzed "the dynamic effects of specific macroeconomic variables…on the price of new houses sold in Greece." (nd) Aspergis and Rezitis state that the real estate industry in Greece is "undergoing drastic reforms due to the liberalization of financial markets, the drastic fall of interest rates, the obsolesce of the existing stock of houses, and the change of consumer norms about housing uses." (nd)

Housing prices are stated to be affected by economic variables "such as employment, inflation, and mortgage interest rate…" (Aspergis and Rezitis, nd) Findings reported by Aspergis and Rezitis show that "shocks to both the housing mortgage rate and employment account for more variation in housing prices than variation produced by shocks to the money supply and consumer prices." (nd) Over a period of up to 20 quarters it is stated that "shocks to the housing mortgage rate and consumer prices account for more variation in housing prices than variation caused by shocks to the money supply and employment." (Aspergis and Rezitis, nd)

Aspergis and Rezitis state that the variable with the highest explanatory power over the variation of the housing price is the housing mortgage rate, which explains about 20.8% of the variation, up to 4 quarters, and about 45.6% of the variation, up to 20-quarters." (Aspergis and Rezitis, nd) Stated as the variables following the housing mortgage rate in explaining the variation of housing prices are employment and consumer prices, which explain 16.7% and 13.3% of the variation, respectively, up to the 4th quarter. For a longer period…consumer prices explain about 35.5% of the variation in housing prices, while employment explains only about 15.2% of the variation." (Aspergis and Rezitis, nd) Aspergis and Rezitis state finally that the money supply provides an explanation of only a very small percentage of the housing prices variation accounting for approximately 5.4%, up to the 4th quarter and 1.2% up to the 20th quarter." (nd)

VI. FACTORS THAT INFLUENCE the PRICE at a COUNTRY LEVEL

The work of Hunt (2000) states that physical characteristics that affect the sales price and rental rates of industrial properties were those of: (1) contiguous available space; (2) ceiling height; (3) amount of office space available; (4) rail availability; (5) sprinkler system, (6) number of dock-high and grade-level doors and age of property. (2000) However physical characteristics only serve to explain 23% of the variation in rental rates. Therefore, physical characteristics are the primary factors influencing industrial real estate prices. The work of states that real estate prices and stock prices are "…both affected by the level of economic activity, by interest rates and the cost of labor." (Hunt, 2000)

Additionally stated that stock prices may increase due to increase opportunities for investment in an economy's corporate sector." (Hunt, 2000) it is further reported that changes in the cost of labor could also induce a negative relation between stock prices and commercial real estate values. For example, forcing competition may lead to decreases in domestic wage rates, which in turn lead to increased corporate profits and higher stock prices. However, if wage rates in the building sector also decrease, construction costs decline and the value of commercial real estate will fall." (Quan, 1996) Wages rates in the building sector which decrease results in construction costs declining and the value of commercial real estate falling.

Noted as affecting international investments in real estate are the factors stated as follows: (1) lack of domestic investment opportunities, small home market; (2) Greater liquidity of International property markets; (3) Arbitrating market conditions; (4) Diversification due to different economic and political environments; (5) Returns have low to negative correlations suggesting diversification benefits; (6) Ability to invest in property-specific features that are different from domestic opportunities; (7) Improved global access to investment capital, change in investment regulations; (8) Currency strength; (9) Higher yields; and (10) Growing international cooperation. (Spremann and Gantenbein, 2003)

Stated as risk factors for country-level investment in real estate are those stated as follows: (1) ability to identify acquisition in a foreign market; (2) additional uncertainty due to currency fluctuations; (3) management and operation once investment is made; (4) taxation differences; (5) increased taxation costs; (6) lack of local expertise; and (7) potential for misunderstandings due to cultural or language difficulties. (Spremann and Gantenbein, 2003)

VII. REAL OPTIONS and CONNECTION WITH REAL ESTATE

The work of Guma (2008) entitled: "A Real Options Analysis of a Vertically Expandable Real Estate Development" states that just as in other great business ventures, "grand successes in real estate development are often attributed to individuals with strong visions and talent, as well as a keen foresight on the future conditions which will ultimately decide the value of their projects. According to Guma states that even with the best in the way of forecasts and prediction that it is generally difficult to bring a clear view of the real estate market of the future into focus." (2008)

Guma states that flexibility in real estate development comes from the ability to change the nature of course of a project as future events are revealed. These opportunities are referred to as 'real options' and are the right, but not the obligation to different actions in capital budgeting in response to future knowledge or events." (2008) Guma states the traditional discounted cash flow (DCF) and net present value (NPV) approaches will typically ignore options available in the future." (2008) Stated as an alternative strategy that is used less frequently is building the options into a singular structure allowing for an option to expand (vertically) under favorable conditions." (Guma, 2008)

Projects of this nature are stated by Guma to "…present an interesting design, engineering and project management challenges, the result of these efforts is a clear option in the scheme which may ultimately add the value of flexibility to developments which ordinarily stand statically." (2008) Stated as a basic toolset in valuation of a real estate development project is the "multi-year discounted cash flow analysis and decision based on a net present value." (Guma, 2008) it is stated that the NPV rule is commonly understood to provide a sound method for deciding between mutually exclusive opportunities by defining the alternative with the greatest value." (Guma, 2008)

In addition this method allows for the "rejection of any alternative which presents a negative NPV. This process inherently forces a decision based on a set of fixed forward looking assumptions and ignores the value achievable when flexibility is provided in a project. Real options analysis provides a means to quantify the value which brings flexibility to a project in its ability to respond appropriately t o uncertainties in the future real estate market." (Guma, 2008)

I. VANILLA OPTIONS and RELATION WITH the REAL ESTATE

There are two primary types of options: (1) American options; and (2) European options. (Forbes, 2009) American options are of the nature that they can be "exercised at any time between the date of purchase and the expiration date. Included are the majority of exchange-traded options." (Forbes, 2009) European options are different from American options since they can only be exercised at the end of their lives." (Forbes, 2009) the simple options are referred to as 'Vanilla options" and are differentiated from 'Exotic options'. The Vanilla Option is described as well as an option that is "straight-forward, the simplest type of option, a call or put, known as vanilla because of the ubiquity of that flavor." (Sticht, Harvey, nd)

It was reported in the work entitled: "Vanilla, Home Loans Could Benefit Borrowers" that "If President Barack Obama gets his way, consumers who take out mortgages would automatically get a "plain vanilla" loan - such as a traditional 30-year fixed-rate mortgage - unless they opted for a riskier variety." (Zibel, 2009) What this would mean to mortgage brokers is that the huge fees that they have been in receipt of for promoting adjustable-rate and interest-only as well as other risky loans. (Zibel, 2009, paraphrased) There is a fine balance that must be realized between stifling innovation and competition and encouraging use wiser loans for customers purchasing real estate. Therefore, vanilla options as applied in the real estate industry would refer to more standardized real estate loans.