The two largest REICs have entered a restructuring phase

The commercial real estate market is undergoing a restructuring phase with the two largest  Real Estate Investment Companies (REITs) – Prodea and Trastor –  preparing their next moves.

Prodea Investments has proceeded with the sale of properties representing approximately half of the value of its portfolio and is in the midst of a broader transformation.

Trastor is also heading towards an increase in its share capital, amounting to at least 120 million euros, in order to obtain the required dispersion in its share. Eyes are focused on whether it will be limited to the domestic market or whether it will seek to attract foreign investors. Today, 98.34% of its share capital belongs to Piraeus Bank.

At the market level, the “feeder” of REICs, as well as developers, remains the purchase and sale agreements. Meanwhile, Prodea has sold properties of approximately 1.275 billion euros to the National Bank and the Yoda group of businessman Yannis Papalekas.

However, developers also see some kind of stagnation.  “Not many deals are being made because sellers are asking for more than developers can offer as a result of the increase in construction costs. There is a mobility problem in the market, funds are not circulating,” the main shareholder and CEO of Hellanic Properties, Errikos Arones, replied when asked to comment on the picture of the commercial real estate market, in a recent press briefing.

“It is satisfactory for us to sell with a yield of 6%, while on their part the buyers insist on 7%,” he explained and added that “one of the problems is that the shareholders of large institutional real estate companies maintain very high participation rates. Abroad, the average dispersion in shares reaches 82%, while in Greece it is limited to 26%.

The way in which the required yield directly affects valuations is decisive for the performance of the market. For a property with an annual income of 600,000 euros, a 6% yield translates into a value of 10 million euros. However, if the investor asks for a 7% return, the same investment is valued at approximately 8.6 million euros. The 1% difference in yield ‘eliminates’ over 1.4 million euros from the value of the property, explaining the sharp discrepancy between sellers’ and buyers’ expectations.”

Downward trend

Under these circumstances and according to estimates by real estate executives, it is not ruled out that a mild downward cycle in the commercial real estate market will gradually begin in the near future.

Prodea remains the largest REIC among the other seven, in terms of portfolio value. It exceeded 3 billion euros, when none of the others, based on the latest official data, has reached the milestone of 1 billion euros. Nevertheless, its share has never had sufficient dispersion throughout almost its entire history. One of the reasons why it chose to sell a significant part of its portfolio is the return of capital to its main shareholders – most famously Castlelake – through increased dividends.

The company is now in a transformation phase, focusing on the luxury and high-end hospitality sectors in Greece, Cyprus and Italy and, selectively, in markets such as Spain, as well as logistics. As its management has pointed out, the international trend in real estate investment companies is to specialize in specific sectors, with the greatest investment interest focused on hospitality and logistics, sectors that can potentially attract foreign investors.

Prodea’s divestments, which are expected to continue, concern properties acquired in the last 12-15 years and which recorded significant capital gains after the financial crisis, due to rising prices. After all, Prodea was one of the companies that invested in real estate during the crisis as well.

According to the executives’ statements, investments in logistics are expected to be included in a separate pillar, as is already the case with the hotel sector, through the subsidiary Mediterranean Hospitality Venture (MHV). At the same time, in the next two years, it will be examined whether the company will maintain the legal form of a REIC. Its exit from the Stock Exchange is not even ruled out, while there are no plans for a public offering of shares (placement).

As the company’s CEO, Aristotelis Karytinos, has stated, “our goal is to form a corporate structure with increased flexibility, which will be based on specialized pillars, so that each of them can attract its own investors, while providing the possibility of exit to existing shareholders.”

On its part, Trastor is preparing for the capital increase, likely in March, which, according to its management, it will signal its further growth towards a real estate portfolio that will exceed 1 billion euros. It is estimated that Trastor has the ability to draw part of its next investments from the portfolio of Ethniki Insurance, which is owned by its main shareholder.

In general, if one examines the institution of Greek REICs, he will find that, with few exceptions, they have not fully fulfilled the role for which they were established. Under normal circumstances, they should have a broad shareholder base, with small and large institutional investors – such as insurance funds – as well as small shareholders who will benefit from dividends in the long term.

Despite this, the sector continues to demand improvements in the tax regime and continues to invest, albeit with fluctuations in pace, while adhering to the transparency rules provided for by the institutional framework — a requirement for the Greek real estate market over time.