MR&H in conversation with Thanos Papasavvas, Founder and CIO, ABP Invest Ltd.
MR&H caught up with Thanos to cover some questions front of mind amongst our investor and developer community ahead of Mediterranean Resort & Hotel Real Estate Forum (MR&H) being held in Athens this October.
1. Specialized hotel real estate investors are looking for assets they can add value to and in turn sell on to more institutional long-term capital – do you think the Southern European markets offer this type of value and long-term opportunity?
We expect a supportive macroeconomic environment albeit amidst rising social and political change. The economic inequality in the developed world triggered by the global financial crisis through ample liquidity for investments, technological advancements and globalisation accentuated income inequality and led to a rise in populism and nationalism. Globalisation has not benefitted everyone.
Both of these social phenomena tend to become more prevalent in periods of economic weakness and stagnation; hence policy makers and politicians will be attuned to keeping macro prudential policies supportive of economic growth and development, both from a fiscal and monetary perspective.
Hence, interest rates are expected to remain low and accommodative in Europe with the ECB unlikely to tighten monetary policy anytime soon and even then commence a very gradual quantitative tightening. At the same time we should expect to see an expansionary fiscal policy with rise in wages and investments across a number of sectors and industries.
This should be positive for real assets in Southern Europe for three reasons: (1) consumers’ increasing purchasing power will bode well for tourism; (2) interest rates will remain low and assist cheaper funding; (3) the continuing search for yield and especially in the private markets’ space will attract asset flows. This will obviously have to be compared against valuations and regional tax policies as well as the broader global market environment.
2. Greece is part of the Chinese $1 US trillion Belt and Road Initiative (BRI) – will Asia or Europe play a bigger role in Greece’s future development and investment plans?
Europe will always play a bigger part in Greece’s future development and investment plans. However, Greece’s proximity to the Middle East with strong recent links to China also bodes well for potential investment opportunities from other regions.
The Greek Foreign and Direct Investment inflows (Chart-1) for the decade to 2018 shows the significant reliance on Europe but also the growing importance of Asia which is dominated by China. It also highlights the positive momentum and upward trajectory of FDI flows into Greece since the eurozone crisis in 2010 and the more recent Grexit uncertainty in 2015.
Chart 1: Net FDI Inflows in Greece during the period 2008-2018 (in million Euros)
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Source: Enterprise Greece, Bank of Greece, *estimates
As well as being part of the BRI, Greece also joined the “16 plus One” in April, a group of countries across Central and Eastern Europe plus China, instigated 7 years ago to enhance economic cooperation in infrastructure, high technologies and green technologies.
In fact I expect trade and investment with China to increase, not only for Greece but for the whole EU region. As Chart-2 depicts, China has been the EU’s second largest trading partner and closely behind the US since the financial crisis, when Chinese stimulus helped the developed markets recover. It currently stands at 15.4% of EU’s trade versus 17.1% for US. More specifically, I expect China to surpass the US and become the EU’s primary trading partner in a few years, driven by its economic growth alongside shifting political developments between US and EU under Trump.
Chart-2: EU top trading partners (based on trade values)
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3. Greece is having an election sometime this year – should foreign investors be concerned or optimistic and why?
Foreign investors should be optimistic, but not complacent.
In accordance with the Greek constitution the general elections have to take place on or before Sunday 20th October. My expectation is that Tsipras will call elections for mid-September, so as to capture the tailwinds of yet another record breaking summer of tourism in Greece.
The margin between the incumbent SYRIZA party and the opposition right-of-centre ND party led by Mitsotakis, has remained stable at approximately 10% for some time (see Chart-3 below) in favour of ND. The margin had been wider pre 2018 but as the economy stabilized and Greece came out of the bailout package sentiment has improved. Tsipras hopes to benefit from a bout of strong tourism in the summer to narrow that gap further, giving him a fighting chance of success.
Chart-3: Poll of polls for Greece
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Source: Politico, https://pollofpolls.eu/map/europe-national
Why should investors be optimistic? The existential issue of Grexit is behind us. The macroprudential policies put in place are in line with orthodox economic thought, albeit still quite stringent so as to meet agreed targets. Growth is expected to range just above 2%, with improved market sentiment as evidenced by the successful bond issuance and 10yr yields at 3.30%. However, I do not expect all smooth sailing, especially with a potential change in government which will raise political and social unrest, at least temporarily.
Why should investors not be complacent? As with the experience of Tony Blair in the UK and Gerhard Schroeder in Germany, it is always easier for left-of-centre governments and politicians to pass through tough legislation and policies. Tsipras has indeed passed through tough measures with practically no social unrest for the past few years. This would not be the case under ND’s Mitsotakis. Hence, investors should be aware of near term volatility and social unrest on a potential change of government. The Greek economy is not in the state of emergency it was post eurozone crisis and hence the measures will not be as punitive; but it will give the opportunity for grassroot supporters of Syriza alongside trade unions to create friction. Could this derail the recovery? I don’t think it would take Greece backwards, but it would make the path to structural reforms more bumpy.
4. What do you think will be the impact of the rise of the far right in Italy on the economy, the tourism sector and the region?
Populism and nationalism will be with us for some time as income inequalities have widened in the developed Western world. The situation in Italy has been representative of the general disenchantment of the population in Europe as a whole, with similar social developments in France, Germany, Greece, Hungary as well as UK and USA.
Italy was the first EU country to fall into recession late last year, as a result of which it took a unilateral decision to join China’s BRI despite strong rhetoric from Washington and Brussels. Italy has rightly highlighted in its defence that exports of goods to China stand at Eur 13bn, less than half of France’s and just a fraction of Germany’s at Eur 94bn. Furthermore, as Chart-4 below depicts, exports to China make up 6.5% of Italy’s total exports compared to 17% for Germany.
Chart-4: Exports to China (%) (share of extra-EU 28, goods exports)
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Last but not least, Italy has also lagged behind in terms of foreign and direct investments from China, as shown in Chart-5 below, with UK and Switzerland having captured most of the pie, followed by Germany and France.
Chart-5: Chinese investment and construction into Europe (2005 – 2018 $bn)
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5. What’s the future of the golden visa policies in Southern Europe?
As the European economies stabilise the reliance on this channel of revenue will reduce, particularly if the social and political shifts become more conservative. Perhaps the barrier will rise so as to contain absolute numbers and yet retain potential revenue and investment opportunities.
6. What impact would a changing government in Turkey have on the opportunities for foreign direct investment into their industry? Would that be redeployed capital from elsewhere in the region or new capital that is waiting to be deployed?
The latest local elections in March were the last ones for the foreseeable future, with the next general elections in Turkey not due until 2023. Hence, this provides a unique opportunity for the current Erdogan administration to address imbalances and turn the economy round so as to attract fresh investments, especially given the valuation of the currency. This would not only provide fresh FDI flows, but curtail the momentum being built by opposition CHP as seen with the recent local election wins in Ankara and Istanbul.
The unorthodox economic policies followed by Erdogan after the failed coup in 2016, alongside the deterioration in diplomatic relations with the EU and US, triggered the currency crisis - which we had predicted last summer and which in our view is not over yet. Our biggest concern then and now remains the lack of central bank independence; we are worried that the central bank may be pressured to cut rates despite the stubbornly high inflation. Furthermore, the latest developments with Ankara edging towards the Russian S-400 air defence system does not bode well with the US, potentially reigniting tensions again.
A politically stable and economically viable Turkey is of paramount importance not only for the region, which has significant and well-known schisms, but also for the stability of the eurozone. The country could offer very attractive business opportunities for fresh money to be put to work, but it would require the commitment of orthodox economic policies and central bank credibility; both of which are lacking for now.
7. What do you prefer – aisle or window seat?
Middle. So I can take over both armrests and open my newspaper wide…
8. What’s your secret spot for a holiday in Greece?
It has to be Eretria in Evia, one of the Ancient Greek cities which sent ships to the Trojan War and also fought alongside Athens against the Persians in 499BC. An hour from Athens.