greek real estate challenges - tegova · 2016-03-31 · greek real estate challenges: an integrated...

Regulated by RICS

Dimitris Andritsos

MSc MRICS

Chief Executive Officer

Eurobank Property Services

October 2015

Greek Real Estate challenges: An integrated approach on property valuations amidst

turbulent times

I. Real Estate Market Overview

II. New Challenges in the Role of Valuers

III. The Contribution of the Greek Banking System

IV. Advanced Tools

V. Case Study: Valuations v/s Actual Transactions

VI. Conclusion

VII. APPENDIX

Table of Contents

I. Real estate market overview

Note: Impact on recent developments (i.e. Capital Controls, MOU III) not yet factored in.

Source: ELSTAT

Inherent Problems:

Lack of Transparency

Tax Regime (Varying tax laws with high tax factors)

Urban Planning Complications

Overall Bureaucracy

Negative pressure attributed to:

Current Economic Climate

Political Instability and Uncertainty

Unfavorable Macroeconomic Forecasts

Resulted in:

Deferral or Cancellation of Investment Initiatives

Decrease in Development Activity

Precarious Forecasts

Requirement for Higher Yields


Sources: The World Bank, Bank of Greece, Eurobank Property Services Research


Structural Changes of Institutional Framework

A series of structural reforms in legislation have been

introduced to attract investments. These are:

Deregulation of commercial leases (Negotiable

duration minimum 3 years instead of 12 years)

(4242/2014)

Significant decrease in property transfer tax to 3%

(4223/2013)

Composite Touristic Investments (e.g. Hotels and

housing in the same development) (2012)

Special Plan of Spatial Development of Public Estate

(ΕΣΧΑΔΑ 3986/2011)

Special Plan of Spatial Development of Strategic

Investments (ΕΣΧΑΣΕ 4146/2013)

Recapitalization of the Banking System. Source: European Commission (May 2015), ELSTAT (September 2015)

28th

5th

Emerging Trends in Real Estate

(ULI & PWC Report)

Investment Trends

Traditionally safe investment

destinations are oversaturated

(London, Zurich, Paris etc.)

Investors seeking returns are

more willing to assume

additional risk (German Stalwart

Cities, European Recovery

Plays’ etc.)

Investments & Infrastructure

Announcements (Indicatively)

Athens Metro and Tram

extensions

Faliron Seafront Regeneration

Pedestrianization of

Panepistimiou Avenue

Exploitation of former Hellinikon

airport (Lamda Development &

Foreign Investors)

Completion of Iconio-Thriasio

Rail line (logistics)

I. Real Estate Market Overview:

A light at the end of the tunnel?

2013 2014

Source: Emerging Trends Europe survey 2014 Source: Emerging Trends Europe survey 2015

“Market value” definition by International Valuation Standards:

“The estimated amount for which an asset or liability should exchange on the

valuation date between a willing buyer and a willing seller in an arm’s length

transaction after proper marketing and wherein parties had each acted knowledgeably,

prudently and without compulsion ”.


Prerequisites for reliable valuations:

In-depth Knowledge of Valuation Methodologies and

Practices:

High Academic and Professional Credentials of

Valuers

Continuous Professional Development

Market Intelligence

Access to Reliable Market Data

Monitoring of Market Trends & Changes

Quality Control: Effective Reviewing Mechanisms

Critical Question

How can this be applied in a

Market which is:

Intransparent

Stagnating (reduced

transaction volume)

Distressed


Number of accredited valuers by TEGOVA 2011-2015,

Source: AVAG

Sophistication of Appraisal Practices

Progress on an institutional level: Increasing

demand for high level of professional and academic

credentials

Specialized institutions’ presence (e.g. TEGOVA,

AVAG, HVI, RICS, ULI, ICSC) in the Greek market

Supported by senior property professionals

Organization of training events (Life-long

learning programs through seminars,

workshops)

Increase in headcount of officially certified valuers

TEGOVA: 29 members in 2009; 504 in 2014

New categories of accreditations have been

added: (e.g. Valuer specializing in Plant and

Equipment)

RICS: 27 members in 2003; 151 in 2015

III. The Contribution of the Greek Banking System

Banking system is the major stakeholder in

Greek Real Estate, controlled and supervised by

European organizations such as European

Central Bank, and national supervision

authorities (Bank of Greece)

Wide network of accredited valuers on a

national level with in depth knowledge of local

sub-markets

Valuers are qualified professionals, certified

by international organizations with high

professional recommendations and having

undergone special training

Assessment of valuers per case and on an annual basis

0

50

100

150

200

250

300

Consumerloans

Residentialloans

Bussinessloans

Total NPLs

Vo

lum

e i

n €

bn

Total Volume of Outstanding Loans

Source: Bank of Greece (BoG)

Appraisal 1st

Review 2nd

Review Sample

Checking

Multiple steps of reviewing process

“4-eye” principal (or 6- or 8-eye for complex cases),

Centralised character of reviewing on a senior level according to predetermined control criteria,

Red flag check,

Sample checking of valuations by external independent valuers.

Specialized Software development (REAL II, WAVE etc.),

Software developments along with the requirements of Internal Control result in high level risk

audit.

Development and exploitation of sophisticated tools

III. The Contribution of the Greek Banking System:

Quality Control

Advanced tools used for valuation assessment and effective risk management:

1. Regularly Updated Market Reports

2. Residential & Commercial Indices which help monitoring Market Trends & Changes

3. Forecasts

4. Sophisticated Statistical Tools which provide Current Market Price Estimations &

monitor Risk (e.g. Automated Reviewing Mechanism (ARM))

IV. Advanced Tools

A wide range of reports covering all major property markets are updated regularly,

estimating the sale price and rent ranges per property type for each geographical area,

early identifying changes in market trends

Market Reports

Property Age (residential properties)

Up to 10 years

11-20

21-30

31-40

>40 years

Location

Expensive

Medium

Economic

Annual Nation-wide reports on local commercial

property markets (offices – retail) in their entirety as

well as their sub-segments.

Periodical Prefecture level reports on all major

markets (residential – offices – retail). For the

prefectures of Attica and Thessaloniki we publish the

respective reports for each of their municipalities. The

number of total reports updated semi-annually is 233.

Specialized market reports as well as major

market sub-segment reports (e.g. Offices on

Syngrou Avenue) or specific area reports (e.g. island

of Rhodes hotel market) etc.

IV. Advanced Tools:

Market Intelligence

Structure of Residential Market Reports

IV. Advanced Tools:

Residential and Commercial Indices

Residential Indices

15 Indices in Attica

24 Indices in Thessaloniki & Rest of Greece

1 Index for Greece

Year of Construction

2 Indices for Greece (Old &

New Apartments)

2 Indices for Athens (Old &

New Apartments)

Commercial Indices

Office Retail

Valuations are collected on a quarterly basis.

IV. Advanced Tools:

Residential and Commercial Indices

0

20

40

60

80

100

120

2007 2008 2009 2010 2011 2012 2013 2014 2015

Residential Index Comparison: BoG - EPS - PropIndex

BoG EPS PropIndex

0

20

40

60

80

100

120

Quarter

EPS Commercial Index

All Office Retail

Residential: 40% decrease since 2007

Commercial: 50% decrease since 2007

Residential Index Forecasts are based on:

– World leading quality macro economic data and forecasts at local

level

– Exhaustive collection of local level planning and building activity

data

– Outcome of advanced econometric modelling, consistent with

latest theoretical scientific literature, fully integrated with relevant

macroeconomic variable forecasts (Inflation, Interest Rates,

Household Disposable Income etc.)

– Covering from short term to long term (over 4 years) horizon, with

quarterly predictions.

IV. Advanced Tools:

Forecasts

Automated Reviewing Mechanisms (ARM)s are testing

instruments based on the structure of Automated Valuation

Models (AVMs).

ARMs use the same tools and information with the AVMs.

The uniformity and performance of ARM’s database has been

carried out according to the Standards on Automated Valuation

Models (AVMs), approved by the IAAO* and ANEVAR.

ARMs enable quick and effective monitoring of valuations.

ARMs work as an ALERT system that point toward the cases with

abnormal deviations.

AVM

Extensive Database &

Updated Market Reports

Forecasting & Questionnaires

Hedonic Regression

Model

Four-phased procedure: An efficient and transparent process of continuous

monitoring

IV. Advanced Tools:

Automated Reviewing Mechanism (ARM)

*International

Association of

Assessing

Officers

Real Time

ARM Filter Valuation

1st Review

Phase 3 Phase 4

2nd Review

Phase 2 Phase 1

Initial Certified Valuation

of portfolio or single

property

1st review from

specialized experts

(market researchers

and reviewers)

Usage of ARM checker

for identification of

large deviations

2nd Review for cases

with deviations

over 20%

IV. Automated Reviewing Mechanism:

Performance Procedures

Average deviation 1.30%

12.80% Mean Absolute

Deviation at National Level

54.22% of appraisals with

deviation less than 10%

About 80.60% of appraisals

with deviation

less than 20%

The quality of the data is

checked daily under a four-

phase procedure.

V. Case Study “Valuations v/s Actual Transactions”:

Data Collection

1. Collection of transactions’ data from multiple

sources:

i. Eurobank Property Services’ Database

ii. Local Real Estate Agents

2. Type of Transactions

i. Commercial

Office

Retail

ii. Residential

Apartments (90% of Sample)

Semi-detached houses

Detached houses

Transactions

Residential (focused on apartments - total sample: 200)

Commercial (Limited # of transactions - total sample: 34)

Research focused on Attica due to the high concentration of transactions.

Source (images): kasrawy.deviantart.com,

www.rightmove.co.uk

http://kasrawy.deviantart.com/art/residential-first-draft-side-329277703

http://www.rightmove.co.uk/commercial-property-to-let.html


Limitations

No study goes without limitations:

Grammy Award Winning Artist Phil Hansen once said:

“Embrace your LIMITATIONS and watch yourself

become LIMITLESS”

In this case study, the following limitations, regarding

transaction data were faced:

1. Insufficient address data (e.g. The street name was

known but not the exact location – street number etc.) Source: Image - http://dfwhailrepair.com/ on 23/9/2015

2. Subjective evaluation of property characteristics amongst agents (e.g. condition of

maintenance, view etc.),

3. Exact Transaction Date (Indexation purposes – e.g. 2nd Semester of 2014 was expressed

as 15/9/2014),

4. Insufficient property characteristics (e.g. floor number, condition of maintenance etc.) for a

small number of transactions.

http://dfwhailrepair.com/

http://dfwhailrepair.com/

Three (3) sets of values were created to be compared to transactions:

Statistically Estimated Value (produced by ARM)

Certified Valuation (desktop)

Market Range

For a transaction to be considered special (non-ordinary), the criterion was to FAIL all three sets

of values. An ordinary transaction only needed to pass one test.

1st check – Statistically Estimated Value

Checks the deviation between the value created by the mathematical model and the transaction.

2nd check – Certified Valuation

Checks the deviation between the value created by the network and the transaction.

3rd check – Market Range

Checks whether the transaction lies between the range of the reports or the extended range +/-20% (loose criterion).

“SPECIAL

TRANSACTION”


Procedure

Results: Ordinary Transactions (68%)

Special

Transactions (32%)

Ordinary

Transactions (68%)

Summary

Transaction

/Desktop

Transaction

/ARM

Market

Report

Ranges

Mean

Deviation -5.6% -6.1% Within

Range

Mean

Absolute

Deviation

12.9% 14.2% Within

Range


Residential Results

Results: Non-Ordinary Transactions (32%)

The results indicate that those transactions were special (non-

ordinary). The sale prices are not close to any of the values

and additionally do not fall within the market report ranges,

leading to extremely large deviations. The results imply that

transactions have occurred in a different level of prices due to:

Tax Motives (not arm’s length)

Special Circumstances (e.g. rumors for haircuts on bank

accounts, capital controls etc.)

Forced Sales (distressed sales)

Other


Residential Results

Results: All Transactions (Non-ordinary & Ordinary)

Special Transactions

(12%)

Ordinary

Transactions (88%)


Commercial Results

Results: Commercial Ordinary Transactions (88%)


Commercial Results

Results: Commercial Non-Ordinary Transactions (12%)


Commercial Results


Summary of Results (Cumulative Charts)

VI. Conclusion

An integrated approach was adopted to improve reliability of valuations in

turbulent times:

1. Improved Qualifications of Valuers (training, continuous professional

development, certifications etc.)

2. Development of Sophisticated Systems (Review Mechanisms, Software –

REAL, WAVE etc.)

3. Utilization of Tools (indices, market reports to capture market trends, ARM,

forecasts).

This approach resulted in a success rate of valuations between deviation

ranges [-20%,20%] of 80% for both residential and commercial properties.

VII. APPENDIX

APPENDIX

VII. Legislative aspects of an AVM

Internationally (UK):

The Financial Service Authority provides general guidance in its Prudential

sourcebook for Banks, Building Societies and Investment Firms (known as

BIPRU). Rule 3.4.66 sets out the method for monitoring property values,

noting that it allows ‘statistical methods to be used to monitor the value of

the property and to identify property that needs revaluation’.

AVM is bound to limitations in usage in line with international practice

Explicit terms and conditions are provided on the EPS website

VII. Development of EPS AVM

The overall construction and assessment of the EPS AVM has been established

according to ANEVAR’s guidelines. EPS followed the hereinafter stages:

Stage 1: Sampling Procedures

Stage 2: Sample Size

Stage 3: Data Management and Data Quality Analysis

Stage 4: Stratification

Stage 5: Determining Model Specifications

Stage 6: Model Calibration

Stage 7: Model Testing for Quality

Stage 8: Model Validation

Stage 9: Model Application

Stage 10: Periodic Check of Model Accuracy

Hedonic Regression Model:

is in the heart of ARM and Index developments

Ln(V6li/V8li) = Σb1ljVji + Σb2jLji + Σb3jaji + eli

provides the optimum coefficients for each

property characteristic, useful in developing a

successful mathematical process based on:

– Market forecasting

Indices are based on historical data and

therefore reflect both the present and the past)

– Market Reports

Cover multiple areas.

Present the current sale price and rent ranges for

each geographical area.

– Specialized Questionnaires filled in by Market

Experts

AVM

Extensive Database &

Updated Market Reports

Forecasting & Questionnaires

Hedonic Regression

Model

VII. Advanced Tools:

Automated Valuation Model (AVM)

Ratio Study Performance Standards

Area Characteristics COD* PRD*

Newer, more

homogeneous areas 10.0 or less 0.98-1.03

Older, heterogeneous

areas 15.0 or less 0.98-1.03

Rural residential and

seasonal 20.0 or less 0.98-1.03

VII. Advanced Tools:

Uniformity and Performance of Database

The uniformity and performance of ARM’s database has

been carried out according to the Standards on

Automated Valuation Models (AVMs), approved by the

International Association of Assessing Officers.

Greek Real Estate has shown a more heterogeneous performance with COD less than 15 (12.8) and an automatic

reviewer model that shows a very good performance both to low valued and high valued properties (PRD close to 1).

*ARM: Automated Reviewing Mechanism

*COD: Coefficient of Dispersion

*PRD: Price Related Differential

greek real estate challenges - tegova · 2016-03-31 · greek real estate challenges: an integrated...

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