Property markets in Cyprus, Greece and Turkey are currently off the radar for most cross-border investors. But local institutional investors are still active. Maha Khan Phillips reports

If institutional investors are wary of making further allocations to real estate, it is hardly surprising. In the wake of the credit crunch, global investment in commercial property plummeted 59% to $435bn (€333bn) last year and is likely to fall even further, according to analysis from property advisory firm Cushman & Wakefield. Values have been wiped out, and across the globe property prices across all sectors have suffered.

Returns in 2008 reveal European non-listed property funds are facing major difficulties. The INREV Institutional Vehicles Index returned -26.8% in 2008, down from -3.9% the previous year.

For all these reasons, it is surprising to learn that institutional investors in Cyprus love real estate. Unlike most other countries, Cyprus has bucked the trend. Real estate yields have remained stable at around 5% according to Marinos Gialeli, general manager at the one of Cyprus' largest pension schemes, Hotel Employees' Provident Fund.

"In Cyprus, over the year, real estate has posted real returns. We feel it is a safe investment. Because Cyprus is an island, land is limited. It's not a big country where you can go from one place to another, and prices reflect that," Gialeli says.

Hotel Employees' Provident Fund is committed to a domestic real estate allocation. The fund, which has invested assets of over €260m, is increasing its exposure to real estate to 15%. Current allocation stands at 7%. Consultants say property investing is almost sacrosanct to institutions on the island.

"What is unique to Cyprus is the fact that property has always been the diamond in everyone's portfolio, be it private money, family money or pension money," explains Marios Yiannas, a consultant with Hewitt Associates in Cyprus. Because real estate prices have tripled in the past five years, property is considered a safe haven, although recent events might change this, he explains.

"There is a feeling that property will remain stable for long periods of time, although given the current economic crisis this might change, since there is a worry in the marketplace that property prices will take a correction. Real estate interests pension funds a great deal. A significant proportion of pension fund trustees are much more interested in property than in shares," says Yiannas.

Pension funds do not seem concerned about a possible bubble developing in the market. "I don't think we're anywhere near such a case. Prices may come down in the areas around the capital, because a lot of tourists bought houses and now want to get rid of them. But that's not going to be a disaster. There are still people who have money and want to buy," explains Gialeli.

Others disagree. "The market has been drying up. There have been hardly any transactions, especially on the West Coast, which was primarily targeting golf properties to the expat British market," explains Christos Spanos, founding partner and managing director of XS Capital, a Cyprus-based asset management house specialising in property funds in Eastern Europe.

"We haven't entered the Cypriot market because it is very small and we felt there were large enough players already there," explains Spanos.

For its part, Hotel Employees' Provident Fund has recently completed an asset liability management study, which it is now planning to integrate into its portfolio. As a result, the fund may invest in property overseas for the first time. But, says Gialeli, it will only ever invest directly.

"Through most of my career, I felt that going through an international manager was probably the best solution. But now, I think we've seen that it's not the best solution at all. It's better to invest directly in real estate, not through a manager. It's just not worth it any more. Managers need to organise what they are doing and, more important, they need to be transparent," says Gialeli.

Therein lies the rub. Direct overseas investing is costly, and most pension schemes aren't big enough to make direct allocations. Hewitt estimates the total Cypriot market to be roughly €4bn, of which €2.5bn is in defined benefit (DB) schemes and €1.5bn is in defined contribution (DC). Although there are 1,900 registered DC funds, most of the €1.5bn remains with the top three players in the industry. Only €5m goes into real estate from smaller players, severely limiting their options. And a lack of opportunities has not helped either.

"The sophistication of trustees has just started to pick up, but 80% of assets are still kept in cash. The next step is implementation, and that's where we are seeing a delay at the moment. A lot of clients have done their strategy work, but when it comes to implementing it the current climate doesn't help at all. Pension funds have deferred implementation until a later time," explains Yiannas.

Cyprus' political situation also plays a part in future growth, explains Spanos. "There has been some interest from foreign institutions which I expect to grow. The big question in Cyprus will always be about if and when we do find a solution to the Cyprus problem, then that will free up 30% of the island."

If Cypriot pension schemes are hampered by size, then Greek institutional investors are hampered by legislation. "Greece has always been difficult. It's quite an attractive market in some sense, from the point of view of western institutions, but the market is very difficult to get into, and land ownership is very complex," explains Tony Key, professor of finance at Cass Business School in the UK. "It's never matured into a destination for big players. It's kind of off the map and the legal structure is very complicated."

In 2007, the Greek pensions industry was rocked by the so-called structured bond crisis. The crisis triggered new legislation that allows pension schemes to invest 1% of their total assets in money markets, allocate funds to the eurozone for the first time, and to create their own property funds through real estate investment trusts (REITs).

REITs are very much a nascent market. The first REIT was incorporated in 2003. There are currently two publicly traded REITs in Greece. The first, Eurobank Properties REIC, has a market capitalisation of €412m (as of 24/03/2009) and a portfolio value of €547m. The second, Piraeus REIC, has a market capitalisation of €78m (as of 24/03/2009) and a portfolio value of €94m.

According to data from Eurobank, there are three more REITs in development. MIG Real Estate has received permission from the Securities and Exchange Commission to launch its product, and is expected to enter the Athens Stock Exchange this year. The initial portfolio of the company is around €57m, according to Eurobank. OTE Estate, the subsidiary of the national telecommunication company of Greece, has also acquired an establishment licence for a REIT. OTE Estate has share capital of €453m. The third entrant is the National Bank of Greece, which has made some major changes to its real estate department and has expressed the intention to establish a new REIT.

But demand is at a low. "We're in the middle of an economic crisis, the duration and the full magnitude of which is hard to determine," says Panagiotis Mavraganis, manager of real estate advisory services at Eurobank. "Investors are being very cautious, preferring to hold on to their money rather than taking unnecessary risks. This is especially happening with REITs, which are heavily regulated and have to think twice before they do anything that endangers their shareholders' interests."

REITs must have at least 80% of asset value in real estate, and can only invest in commercial and industrial properties. The limit for acquisitions outside of the European Economic Area is equal to 10% of total investments. Properties cannot be sold earlier than one year after acquisition, and a single asset's value cannot exceed 25% of the total portfolio value. Greek REITs cannot directly develop real estate, but they can enter an investment at an early stage with a pre-sales agreement.

For one investment manager, who prefers not to be named, it's a difficult market. "We haven't entered Greece, because you really need to know your way around the relevant authorities. We are looking for properties, and there will come a time when we venture into the market," he says.

XS Capital, meanwhile, is content to wait for the moment, as are many investors. Research from property firm Savills reveals that development activity peaked two years ago in the Athens office market, while a shortage of sights and the economic slowdown has limited transaction activity, which in turn has created uncertainty in the market regarding pricing.

The European Commission expects that the Greek economy will be hard hit by the ongoing financial crisis, and that growth will decelerate further to just 0.2% in 2009.

Turkey has also seen significant regulatory changes affecting its real estate market. These include the introduction of mortgages and the development of REITs.

"REITs tend to be developers as well as investors. There's not a long-term tradition of institutional investment in property. A lot of property is held by high-net-worth individuals and conglomerates," explains Alan Robertson, managing director at Jones Lang LaSalle in Turkey.

Still, things are changing. Robertson points out that large development companies are investing in Turkey, particularly in shopping centres. Redevco Turkey plans to complete its first two shopping centre developments in the third quarter of 2009, for example.

"Some of the larger property companies are now looking at Turkey, but the economic crisis has slowed down their plans," explains Robertson. He also says that, until recently, there were no opportunities for institutional investors to access the market.

"The first shopping centre was built only 15 years ago and most have been built in the last seven or eight years. Property developers in the country had not really had a tradition of trading on their investments. A family-owned conglomerate would own a factory of some kind, knock it down and build an office, which they would lease and retain ownership of. So there's no tradition of development trading," he explains.

And growth will come slowly. "Everyone was excited about opportunities in
Turkey 18 months ago," says Cass Business School's Key. "It was attractive because it had high population growth and the economy wasn't doing too badly. Interest rates were quite high and lots of people looked at buying Turkish shopping centres. But the music has just totally stopped on that. The Turkish economy shrank by 8.2% in the last quarter of last year."

The real estate markets in Cyprus, Greece and Turkey could all do with the boost of international investment, but Key believes it will be difficult to achieve. "Cyprus is far too small a market to interest institutional investors who want to do global investment, and the political problem puts a lot of investors off," he says. Greece will continue to be difficult because of land ownership structures, and Turkey was under-priced in terms of risk.

"In the current market environment there is a flight to safety. Investors don't want to access strange foreign markets with currency problems and quite possibly political problems. Many of these places are off the map," says Key.

For local investors, this couldn't be further from the truth. "We believe very strongly in the potential of real estate here," says Hotel Employees' Gialeli.