Allocator Quarterly Q1 2019

This AQ focuses on developments in the office and residential segments of the real estate markets in Central and South Eastern Europe. We invite our readers to consider new investment options available in these markets, driven partly by the emergence of the millennial generation in the region.

[CITE AQ – Q1 2019]

Real estate has long been considered an established investment asset class, part of alternative investments alongside hedge funds and commodities, and often an important element of institutional investors’ portfolios. While investing in real estate in the US and Western European markets has been very popular, especially in the extremely low interest rate environment of the last decade, real estate in the Emerging and Frontier Markets has been considered a more marginal investment proposition. Indeed, as far as Emerging Markets are concerned, investors tend not to venture further than equities and EM debt, which together typically make up the bulk of the EM allocation in an institutional portfolio.

However, real estate can often be a viable alternative to gain exposure to high-growth economies and use of the leverage element inherent to real estate investing, even at conservative levels, can make a significant contribution to total returns potentially available from this type of investment.

The significant fund flows that have been absorbed by Western European real estate since the Global Financial Crisis, compressing yields to record low levels, seem to have only selectively benefited a handful of Central European property markets. Some of the high-growth South East European markets have gone largely unnoticed by real estate investors, despite strong fundamentals and booming economies. In our Allocator Quarterly from Q3 2018, we discuss in more detail the fundamentals of economies such as Romania and Bulgaria in some detail , and venture to suggest that investing in real estate in the South East European region may be a viable alternative to gaining exposure to these vibrant economies.

It is also worth noting that in 2018 Romania came close to being upgraded from a Frontier Market to an Emerging Market by index providers , suggesting that its markets in general may begin to benefit from a higher level of investor interest going forward.

One of the main reasons why investors may not look at Central and South Eastern Europe closely as a viable source of real estate exposure is lack of knowledge of the regional real estate markets and understanding where opportunities may actually lie. Those investors who attempted to participate in these markets in the past may have entered at the peak of the global boom in 2007-2008, prior to the GFC, and have obviously suffered disproportionately as hot money vacated the region entirely in the years that followed. Also, strategies involving chasing prime assets, or focusing on very large luxury residential developments did not fare well in the extreme cycle, as such assets may have been out of sync with the needs of the local population.

For an investor, willing to take a second look at the Central and South East European region today, there is a case in selectively examining certain real estate segments in the region, as some of the more adventurous investors have already begun to do in the last couple of years. These include a number of specialist companies who raised their funds via capital markets , and have been among the first institutional investors to return to these markets post GFC.

And as far as understanding the real estate opportunity in the region, unsurprisingly it is not too dissimilar to what investors are used to expect in more established markets. To illustrate the point, in this edition of CITE Allocator Quarterly, we discuss two trends observed in Central and South East European real estate markets:

  • the increasing use of co-working spaces in capital cities in Central and South East European region, and the related need for investors to consider this trend when evaluating office space investment opportunities;
  • the emergence of the new version of the “Private Rental Sector” in the region, and the new opportunities it may create for investors wishing to gain exposure to the region’s economic growth.

We hope to hear from any of our readers with whom these topics resonate and who would like more information on any of these trends and related research.

Allocator Quarterly Q4 2018

This AQ focuses on the significant shifts the Health Care sector has experienced in the last decade, particularly affecting the product-focused industries such as pharmaceuticals and biotechnology, as well as the drivers for the development of the sector going forward.

[CITE AQ – Q4 2018]

The Health Care sector globally has undergone a quiet revolution in the last decade. Regulatory changes in the US with the introduction of the Affordable Care Act by the Obama administration in 2010 on the one hand, with on the other hand continued regulatory adjustments across all Western markets with increased focus on “value” for patients and the ominous “patent cliff” with its ripple effects still working through the sector as we speak, have hit and their effects have been absorbed by the Health Care sector as a whole, for it to emerge as one of the best performing sectors of the last few years globally.

This was accompanied with the M&A deal frenzy of the last few years, in part spurred on by tax changes in the US in the last year, along with the emergence of China as a global player in the Health Care M&A space, and finally technology driven changes in how R&D is conducted, with significant advances in fundamental science.

A decade ago the sector was considered the “sick” sector of the global economy, with innovation on the decline as measure by productivity of R&D dollars, and the decrease in the number of new molecular entities approved by regulators. The sector was facing an uphill struggle to preserve top line revenue with the advent of the “patent cliff”, and has had to evolve and adapt to thrive.

Today, the sector has been transformed, having embraced modularization at most stages of R&D and production, with the use of Contract Research Organizations, M&A, alliances and partnerships across the industry, as well as Contract Development and Manufacturing Organizations.

New players, such as Biotech, have grown to represent a significant part of the Health Care sector, transforming the science of medicine making. These elements together have increased the pipeline of R&D across the biopharmaceutical subsector. The regulator in the US has also put increasing focus on a collaborative approach and accelerated pathways to approval, in order to facilitate a rise in the number of active substance authorizations. At the same time, headwinds for the sector remain, with unrelenting threat from generics and biosimilars, the continued government and payers scrutiny on pricing, and regulator attention to preventing anti-competitive practices.

With the looming increases in interest rates which will invariably increase the cost of capital and may further dampen the buoyant Health Care sector, investors may wonder whether valuations in some instances have become significantly stretched and expect a continued pull back on the back of the October and November sell offs. Also, the newly re-introduced trade tariffs between US and China are likely to require supply chain adjustments in the biopharmaceutical subsector, because of its global footprint.

Despite the near-term obstacles, the long-term trends will continue to provide support to the sector, among which the aging global population, the increased incidence of chronic disease across the emerging economies, as well as the introduction of universal health coverage in many countries. The future of the Affordable Care Act in the US is still unclear over the near term, as the current administration has worked to limit its reach. However, it has been doing so to a much lesser extent relative to the harshness of the rhetoric during the 2016 presidential campaign, so there may be hope for the ACA structures to remain with us for the long term.

Finally, the nature of health care itself is also changing with the emergence of integrated care facilitated by the use of technology and digital diagnostics. The increasing focus on the patient as the consumer who is in control of their health and treatments, and the focus on consumer choice has been a central pillar supporting the emergence of the digital health technology sub-sector. This digital health technology stream has enjoyed a strong wave of VC funding and has invited many corporate M&A deals in the last 18 months. The foray of the likes of Amazon into the health care space has created further disruption to the comfortable status quo in the sector.

The health care sector is accustomed to continually adapting and exercising agility to preserve its top line revenues and control costs. It will need to continue using its agility in order to stay competitive.

We look forward to hearing from many of our readers with more insights into and views on the health care sector, and engaging into a debate on its future.

Investment for Sustainable Real Estate in South Eastern Europe


EU and EBRD funding and initiatives have contributed to reducing external energy dependency in South Eastern Europe. Private funding is now needed to improve the energy efficiency of building stock.

[The article from the Financial Investigator magazine, 2018 issue 6]

The UN’s Sustainable Development Goals establish a vision ensuring a more sustainable human activity footprint, with goals for ‘Affordable and Clean Energy’ and ‘Sustainable Cities and Communities’.

Alongside this, more pressing concerns centre around global energy security. The European Commission’s 2014 Stress Tests identify Central and South Eastern Europe as at risk of supply disruptions due to geopolitical uncertainties.

To address these dual considerations, the European Commission put in place a framework of initiatives, such as the establishment of Central and South-Eastern European Energy Connectivity (CESEC) in 2015 and the CESEC 2.0 in 2017, as well as various funding streams with the Cohesion Policy Funds (CPFs) and the European Fund for Strategic Investment (EFSI). While significant progress has been made since in implementing supply-side measures by improving regional market integration and strategic energy infrastructure (the latter also partly achieved through EBRD(1) funding), demand-side measures have lagged.

According to the 2017 report by Building Performance Institute(2) (BPIE), regional building stock still on average consumes 38% of its gas imports, while the European Commission’s 2018 report(3) shows that in Romania, in 2015, residential alone represented a 33.7% share of final energy consumption, which is well above the EU average of 25.4%. BPIE estimates that a dedicated renovation programme targeting gas-consuming buildings could reduce the current building stock’s gas consumption by 70% within 20 years.

The potential savings from increased energy efficiency of the building stock in the region are obvious. So why have we not seen a greater number of demand-side energy efficiency projects? A closer examination of the amount and types of EU funding available for such projects in the CESEC region provides some answers.

EU funding pools such as the EFSI, designed to leverage private capital, only allocate 1.25% of their committed capital to projects in CESEC. With the EFSI funds mostly targeted to supply-side initiatives in more mature European markets, the other reliable source of capital for CESEC-focused energy efficiency projects comes from CPFs, currently offering a total funding of €3.96bn to the region.

Although in absolute terms a large number, this amount is to be spread over seven years across seven countries and translates into a per square meter investment rate of only €3 in Romania, as an example. This compares rather unfavourably with Poland, alone scheduled to receive as much as € 3bn over the same seven-year period.

The types of funding most popular for energy efficiency projects are also sub-optimal, with non-repayable grants crowding out more efficient types of funding, that could have the potential to unlock larger pools of private financing. Despite the record low interest rates of the past decade, non-repayable grants remain the preferred form of financing, partly due to concerns of breaching EU debt and deficit thresholds.

On the positive side, the EU continues to fund training initiatives on the ground, to improve the energy efficiency competence of the local building trade workforce. These initiatives include Building Knowledge Hubs which disseminate techniques in nearly Zero-Energy Building (nZEB) and deep energy renovations.

Allocation of CPFs for Energy Efficiency

Critically though, energy efficiency is just one side of the coin of building sustainability in South Eastern Europe. The other side is the resilience of buildings in a region that is periodically affected by earthquakes of varying magnitude. According to a 2016 report by World Bank Group/GFDRR(4), capital loss from a severe earthquake in Romania and Bulgaria is estimated as high as 11% and 8% of the
countries’ GDPs respectively, with the annual average affected GDP standing at $ 20bn across the SEE collectively.

An academic paper by Georgescu et al(5) states that 69% of buildings in existence in Romania in 2011 were constructed prior to the 1977 earthquake. Post 1977, repairs carried out on surviving buildings were limited to the bare minimum, resulting in increased risk of significant damage from future seismic events.

Construction practices have since evolved in the region generally, and in Romania specifically, gradually moving away from the old cast-in-place RC shear wall structures to increasingly using RC framed structures with regular column patterns, more resilient in case of seismic events.

Successive iterations of the Romanian seismic design code, with the last version dating from 2012, have reinforced the requirement to evaluate building risk, and finance remedial works in certain cases. Strengthening techniques prescribed include jacketing of frames or frame bracing, where necessary.

Other changes that improve sustainability of buildings in Romania include the 2007 requirement for developers to supply an energy performance certificate on all new and refurbished structures.

Demand-side factors have had a strong pull effect that has encouraged these changes. An increasing number of stakeholders require a higher standard of sustainability for new buildings in the region, according to David Allen of Chayton Capital, a London-based real estate investment manager and winner of multiple sustainability awards for its SWAN office park in Bucharest.

‘Lenders are interested in financing assets with healthy D&A characteristics; tenants, whether for office or residential assets, want to minimize their service charge’, says David, ‘while institutional investors have an increased ESG awareness and push their development and architect teams to prioritise sustainability. Sustainably constructed properties are easier to market, and nowadays local developers increasingly aim for their projects to obtain one of the sustainability certifications, such as BREEAM or LEED’.

David believes that while the EU and EBRD funding has been gradually increasing, it has been mostly channelled towards public buildings and refurbishments. He expects private funding to continue playing a critical role in supporting an overdue wave of new construction in the region, with focus on modern sustainable buildings.


– As appeared in the Financial Investigator magazine, 2018 issue 6

  1. Mario Tanev, ‘EBRD invests 100 mln euro in Bulgaria’s BEH 7-yr bond’, August 2018
  2. Buildings Performance Institute, Financing the future of buildings in Central, Eastern and South-East Europe, 2017
  3. European Commission, ‘Guide on good practice in energy efficiency for Central and South Eastern Europe’, 2018
  4. World Bank Group/GFDRR, ‘Europe and Central Asia – Country Risk Profiles for Floods and Earthquakes’, May 2016
  5. Georgescu et al., Seismic and Energy Renovation. A Review of the Design Approach in Italy and in Romania, Sustainability, May 2018