Greece has seen a leap in visitor numbers, up more than 11 percent in the past year alone, with 32 million people expected to visit the country this year.
Understandably, the growth in visitors is driving demand for hotel rooms, and while investors are eager to get into the market, their ambitions have been stalled by the government’s reluctance to resolve nonperforming loans.
This reluctance has now been overcome, allowing banks to start getting loans off their books and impatient operators to get into hotels.
The Challenge of NPLs
Among the peripheral Eurozone countries that were hit hardest by the 2008 global financial crisis, Italy, France, Spain and Greece had the largest NPL exposures, totaling €530 billion and representing two thirds of the total. In Greece, the ratio of NLPs to overall loans was 45 percent, but whereas Italy has taken steps to reduce its bad loans, Greece has been slow to act.
“Greece has a leftwing government, which was reluctant to create laissez-faire legislation, partly because of their ideology, but also because, with high unemployment, it would have been hard in terms of broader economic, political and social ramifications,” said Thanos Papasavvas, founder & CIO of ABP Invests, noting that Greek Prime Minister Alex Tsipras now looks “more like an established politician,” and will be able to make these changes.
“After the financial crisis, we had the Eurozone crisis straight afterwards and, whereas other countries had the benefit of quantitative easing, Greece went into negative territory with NPLs,” Papasavvas continued. “Italy has had the benefit of putting together a process for NPLs, but now that Greece does, this should change. It helps that tourism has been booming in Greece, there has been a clear hotel supply shortage, so they are dealing with the structure, although maybe not as fast as they could.”
The issues facing those who needed to cut NPLs and build the country’s economy back up on a stronger foundation were numerous. “There were strategic defaulters—companies who do not pay their loans or their dues, either because of their relationships with the banks or because the courts took so long,” Papasavvas said. “Between 20 percent and 25 percent of the loans are strategic defaulters. You would also have a hotel where the family has had it for generations and has a different perceived value than the bank does and it is hard to force them to sell—something the new legislation will address, although it is very slow.”
Structural Changes
But the government has now made structural changes, including an out-of-court workout, a household insolvency law, an e-auction framework (which reduces public auctions, often a flashpoint for demonstrations) and protection from criminal liabilities for officials or staff involved in NPL sales and restructuring.
It has only been over the past year that the Greek NPL market has shown some signs of a turnaround with each of the four key banks coming to market with their respective projects, including Eurobank's Project Eclipse in October 2017, Alpha Bank's Project Venus in March 2018, Piraeus' Project Amoeba in May and most recent Project Earth by National Bank of Greece in June.
The combined total was approximately €5 billion of book value. Alongside NPLs being packaged and sold, the Greek banks have also been in discussions with corporate credit managers, private equity and turnaround specialist firms that look for large corporate loans, purchasing real estate or investing in real estate companies. A handful of those have gained the necessary license from the Bank of Greece with a dozen or so in the process of doing so. KKR's Pillarstone, for example, was the first independent corporate nonperforming exposure platform to gain a license in May 2017; its first transaction in Greece was Famar, a healthcare service provider established in 1949, while also working with Alpha and Eurobank on the Notos department store chain and Kallimanis frozen seafood.
Within the hotel sector, according to the Association of Greek Tourism Enterprises, out of a total €8 billion in loans to the Greek tourist sector, €3 billion were considered NPLs.
The first wave of hotel sales started in December, driven by Greek banks and some private suppliers who have issued loans the hotel proprietors are unable to service.
“I think the situation is going to sort itself out one way or another, but it needs to get faster,” said Dimitri Konstantopoulos, deputy general manager, CEO’s Office at Piraeus Bank. “It used to take five years. Now it takes two as the procedures are speeding up.”
What Greece Needs
Greece’s tourism market is booming, but in order to keep growing, it needs increased investment and new supply to meet demand. According to PwC, the number of additional beds required by 2022 is around 45,000, at a cost of €1.7 billion.
Upgrading and maintenance was also required, at an estimated cost of €2.3 billion for upgrading existing hotels and €800,000 for maintenance of hotel infrastructure. In total, PwC said that by 2022, investments totaling €4.8 billion will be needed to keep Greek tourism on course.
“Everyone is after the sector in Greece,” said Konstantopoulos. “This year we are due to get 32 million visitors. Investors are here and they are willing to pay much, much more than they were a few years ago. Big bids for problematic hotels have gone up but yields have gone up, as well. They are paying more but they are getting more.”
Ninety percent of Greece’s deals are single assets, said Konstantopoulos, noting that much of the country’s supply is made of family-owned and family-run hotels. “When the Blackstones and the Carlisles of this world come over, they want a portfolio, and we cannot create a portfolio of similar assets. We have a portfolio of loans and can sell them and they will then need to find operators who can tell them whether what they are buying is going to be profitable.”
The operators have already started to make inroads into the country, with Hyatt Hotels Corporation announcing the first Grand Hyatt in Greece after signing a franchise agreement with Henderson Park and Hines. The hotel is due to open in the third quarter of this year, with Takuya Aoyama, VP, development, Eastern Europe, Russia & CIS, Hyatt, commenting: “We have long sought to bring the Grand Hyatt brand’s celebratory luxury to the Greek capital. This deal represents a significant milestone in Southeast Europe, an important growth market for Hyatt with recent Hyatt development announcements in Turkey and Bulgaria.”
The property formerly was the Ledra Marriott Hotel, which closed in 2016 and was acquired by Henderson Park and Hines last year at auction for €33 million. “The Ledra hotel has a strong history of being amongst the top five star hotels in Athens, one of Europe’s top tourist destinations, and presents a significant repositioning opportunity,” said Nick Weber, founding partner, Henderson Park, at the time. “The transaction also marks our entry into Greece, a market where we hope to make further acquisitions.”
Konstantopoulos said that while some big operators are coming into Greece, they are mostly after specific assets. “Brands will not take the risk of ownership,” he said. “It is a must-have market but they are looking to the funds to take the risk.” With available room stock limited, he added, conversions from other uses are growing in popularity.
Konstantopoulos warned that there could be a time limit on the opportunity in Greece. “There is a party going on in Athens and everyone wants to go, but if Istanbul comes back that could change. People are not coming just because they have discovered that the Acropolis is a nice place to come in the past three years. Athens is up because of Istanbul.”
The wheels are starting to move on transactions in Greece, but those hoping to turn a quick profit in this cradle of Western civilization may still need to be patient.
Katherine Doggrell is an editor at Hotel Analyst, the U.K.-based news analysis service for hotel investors.