The country's pension system has been hit hard by austerity measures but it will benefit from a more professional approach to property investing, as Gail Moss finds

Amid the turbulence of the Greek financial crisis, there is one piece of good news for the country's tiny pension fund industry - occupational pensions coverage in Greece is low, largely because of the generous state pension, which has often provided employees with replacement ratios of close to, or even greater than, 100%.

In the vast majority of cases, occupational pensions are provided through group insurance policies. There are only a handful of pension schemes (in the form of IORPS) because these structures are not encouraged by the local regulatory framework, while there is a lack of clarity in terms of the taxation of benefits.

Existing pension schemes include those for the Post Office, casino employees and air traffic controllers.

However, the social security laws passed by the Greek government last July - intended to help shore up the public finances - include provisions which are likely to kick-start a more professional attitude to managing the real estate assets of pension funds.

"Until now, it has been almost impossible to run these assets efficiently," says Nicholas Tessaromatis, chief executive at EDEKT Asset Management. "This change will help pension funds do a better job and open up new opportunities."

First, the new law allows Greek pension funds to create or participate in real estate investment trusts (REITs) or real estate investment companies (REICs) run by banks. "Although it merely reiterates what they could do before, it is important to have this clarity," says Tessaromatis. "While they still cannot invest in real estate abroad, they can diversify locally, moving from sector to sector. Hopefully they can use professional services to broaden their portfolios."

However, what is likely to be a more fundamental change is the laying down of a procedure requiring pension funds to run their property on a more professional basis.The over-arching package of laws, of which these rules form a part, appoint EDEKT as the fiduciary of the country's social security funds, including pension funds. EDEKT will also carry out the role of strategic adviser and provider of administrative services such as reports, accounts and valuations.

As part of its role, it will act as a vetting agent for property developers. So pension funds wishing to invest directly in property will have to select developers and asset managers from a list of eligible names drawn up by EDEKT.

According to Tessaromatis, much of the real estate held directly by pension funds has been on their books for decades. "In most cases, the property - mainly offices - is not actively managed," he says. "For instance, the rents collected are a fraction of what they should be. This change will give pension funds the opportunity to do things better."

Another factor inhibiting efficient property management is the dual pricing system, whereby property can be valued both at its market price, and a price based on the official state price per square metre. "The official prices are sometimes far below market price, so buildings may be in the books at a fraction of their real value," says Tessaromatis. "Using official prices for valuations also means that pension funds may not have been aware of recent falls in value."

He also says the more rigorous reporting standards imposed by the new pensions law will lead to more market-based valuations for the property investments of Greek pension funds.

But making money from the domestic property market over the next year or so is going to require some astute management.

Natalia Strafti, investment portfolio manager at Eurobank Properties REIC, says: "Compared with the rest of Europe, Greece was lagging behind as to when the effects of the economic crisis were actually felt in the local property market. This year the Greek market is feeling the effects of the economic crisis. The lag was more on the rental side, since sales and acquisitions have already been moving slowly since Q2 2009, as was also the case for most south-eastern European countries."

Strafti says that from the beginning of this year there has been a downward pressure in rents, as retailers and companies tried to reduce their operating costs. Retailers of electrical goods, furniture and clothing, and even supermarkets, are all experiencing reduced turnovers compared with previous years, leading them to request rent reductions in the range of 10-30%.

While retail has been hit much more significantly than offices, there have also been rent reduction requests in the office sector averaging 10-15% as companies contract and reduce space.

A recent controversial law, which strengthened the lease termination rights of tenants has increased uncertainty in the market, putting additional pressure on landlords.

Strafti says that in practice, Eurobank Properties REIC is not agreeing to any rent reductions, except where they are justified by the current market conditions and the agreements with tenants which have already been executed.

Inevitably, property sales, acquisitions and disposals are moving very slowly, says Strafti. "There's an expectation gap between buyers and sellers, so there were very few transactions in 2009, and this is continuing in 2010," she says. "Everyone is waiting to see if rents will carry on falling until they reach equilibrium. At that point, investors will look at investing in the Greek market again, also taking into consideration the market conditions in the rest of Europe, but it won't be for at least another six months."

A further factor acting as a brake on transactions is the soaring cost of credit.

"As with the rest of Europe, bank financing of real estate has been very much hit by the crisis, so spreads have gone up," says Strafti. "A few years ago they were as low as 80bps. Now they are 400bps or higher."

She says: "I don't expect the conditions in the real estate market to change significantly until the end of 2011."

Meanwhile, Greece's property market could also suffer a sting in the tail thanks to the junk bond status conferred on its government debt by the credit rating agencies. Vanessa Rossi, senior research fellow, international economics of Chatham House, says: "In general, because of the debt rating downgrades, it is possible that some European pension funds can no longer invest in countries such as Greece," she says. "That means support for the weakest markets from pension funds could remain low unless ratings improve again.

"For property investments, given the economic risks and likely slow-paced recovery in property prices, pension funds will either be part of the problem - in reducing property investment - or part of the solution, in helping complete and purchase excess property stock, and improve confidence."