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

Allocator Quarterly Q3 2018

This AQ focuses on issues in and around investing in South East European real estate as a means of gaining exposure to strong regional economic growth.

[CITE AQ – Q3 2018]

The world’s attention has been recently captivated with developments coming out of the US, with the
Trump administration resurrecting protectionist trade policies in the face of two decades of increasing
globalization. In Europe, Brexit has been the UK’s response to similar societal issues resulting
from increased inequalities brought on by globalized business value chains. Much ink has been
used in the last few quarters to discuss if and how the UK will leave the EU in a few months’ time.

In the meantime, global growth has returned in force, with European growth also strong in the last
12 months. The quantitative easing measures are being withdrawn in the US, and are also in process
of being scaled back by the ECB in Europe. In the UK, the BOE has equally begun raising interest
rates, to combat inflation, which hit 2.3% in July this year.

As the world economy slowly re-adjusts to life post quantitative easing, investors may re-assess
their expectations of growth in developed markets going forward, with stock market valuations
being close to their historical peaks.

While real estate in the developed markets has been a popular investment choice for many institutional
investors in the last few years, aided by the historically low interest rate environment,
some markets have not yet benefited from the wave of investment that the global real estate asset
class has absorbed since the GFC.

We have recently been looking at the South East European economies, where the real estate asset
class, specifically, still offers healthy yield levels to those investors seeking to benefit from the
strength of regional economies.

We note that the economies of South Eastern Europe, with Romania and Bulgaria being prime examples,
have performed strongly in the last two years, and are expected by the EBRD to continue
topping the European GDP growth tables in the medium term.

We take a bird’s eye view of the macro picture in the region, as well as some of the micro factors related
to reforms and government measures that have been contributing to the strong economic
environment in the region.

We also include an interview with a real estate industry veteran, Tim Norman, who has been investing
in the Central, Eastern and South Eastern Europe for decades. Tim offers a practitioner’s
perspective to investing in real estate in the region and his views on the recent industry developments.

Finally, we take a closer look at the sustainability angle of investing in real estate in South Eastern
Europe. With sustainability being high on the agenda of many professional investors, we believe
that pioneering sustainable development in a region which does not have a history of sustainable
construction, is absolutely critical in achieving investments that should not only provide solid
IRRs to investors, but also make a positive impact on local communities.

We look forward to hearing from many of you if you would like to hear more on any of these topics,
and if they resonate with your organisations.

India June 2017

Global: Emerging & Frontier Markets | Thematic: Taking a fresh look at India.

Full PDF: Investment Update – Spring 2017

It can pay to invest in Emerging & Frontier Markets

We have investigated the recent performance of Emerging Markets and also assessed how India has faired since we initially commented on our outlook for India back in late 2015.

Domestic (Indian) Policies have driven performance contrary to what many believed

It is no surprise that India has done well. Most frequently, the demographic trend is used to describe the opportunity in India. We are more differentiated than that and suggest that a continuous, strong investment plan is enabling the economy to remain resilient and grow.

Fiscal Prudence in times of uncertainty

The decision to devalue the currency late 2016 hit the markets with a surprise and no doubt, caused stir both within the political elite and consumers in India. However, and on balance, the move was a savvy one to recalibrate the ‘way business is done around India’.

Continuing stock market performance

It may surprise Developed Market investors, but India has seen significant investor interest and investment flows have been strong.

We believe that a pull-back is necessary to give the markets breathing room to absorb the recent rally and find a new equilibrium. The market feels somewhat over-bought at recent levels.

Equity Market Valuation

As per above, we feel that some stocks have had a significant run and we doubt that this can continue without being challenged at some stage. For that reason, we are cautious on general ETF products at this stage as these are ‘trend-following’ by design and miss an active overlay. We would certainly recommend to be more selective at this stage.


We continue to favour India over China – and we say this with a 5-7 year horizon in mind. We have allocated to China and India over the years as Principal and Fund Manager investors: we suggest that India has simply more juice left in the tank and has not build its recent economic development entirely on credit which should make it more resilient vs China in the event of a global sell-off.

Allocator Quarterly Q2 2016

This AQ has taken a broader view on themes that we feel are not openly debated on the one hand, and are also ripe with confusion on the other.

Another interesting quarter has passed. The not-so-surprising vote by the British public to exit from the European Union has most certainly made the world a less safe place, both in terms of financial market risk, but also in terms of the general uncertainty facing current and future generations. The implications of the vote will be felt, more negatively than positively, for many years to come.

[Full PDF]

Alongside Brexit, the biggest threat in our view to our way of life is coming, to our great surprise, from the largest economy and market in the world, the United States of America, and the potential election of Mr Donald Trump as the US Presi­dent.

Our piece on Women in Asset Management is really aiming to tease out why wom­en of certain stature and experience, are not making a clearer push for entrepreneurial success or aim for the top at institutional financial services firms. What are the barriers women are facing, as the gender balance situation fails to improve over the long term?

Impact Investing: while there is certainly an element of greenwashing that con­fuses the picture, there is a outstanding investment opportunity that could be un­locked. We are looking at the headwinds still facing the asset class, one of which being the myth that the asset class fails to deliver in terms of returns. We also note the recent developments in regulation, which may help the Impact Investing space attract assets.

Lastly, we picked up on trend in the Commodity Trade Finance industry. There is much talk about Basel III and the impact it has on the financial services sector as a whole, and CTF sector specifically. We feel that the CTF sector presents tre­mendous opportunities for yield hungry investors with limited risk appetite. We also highlight that the theme touches on Impact Investing, and presents a natural extension of our Impact Investment debate.

We hope you enjoy our thoughts. As always we are at your disposal if you wish to engage further.

Allocator Quarterly Q1 2016

Frontier Markets | We invite our readers to move past the artificial segmentation of the various markets and the convenient labels which suggest that some markets are more acceptable than others.

A lot has been and will be written about what happened in the Frontier Markets in 2015 and Q1 2016. We have also spent time discussing the events of 2015 and the challenges ahead. Clearly, the hype surrounding BRICs, N-11 and other elusive acronyms has created awareness of and fashion for a number of emerging and indeed frontier markets. However, it is important to look past the short-term noise and focus on the structural challenges which will impact people.

For the full PDF publication, click here.

The Panama Files - What changes for Family Offices

Transparency, Corporate Governance and CSR are ever more important

Sascha Klamp recently contributed to the Panama Files controvery. In an interview with Campden FB entitled “Panama Papers: Family Offices likely to remain unfazed, reputation biggest threat” (see the full copy here), Sascha suggests that he can only see an impact for multi-family offices or those that oversee third party capital. In a world where transparency, corporate governance and CSR are ever more important, CITE believes that cleaning up the act is now a must for many.

On Bloomberg - Mapping Global Cues

We are finally in line with the market seeing a fed rate rise coming

Sascha spoke on Bloomberg about the luming Fed rate hike decision, December 2015. Further more we commented on potential mutual fund flows into India’s asset management companies 2016/7. Watch the video on Bloomberg here or see below.

CIO FORECITE - India Asset Management Companies

Most recently, Goldman Sachs announced the sale of its unit to Reliance MF for about $37.5m following Deutsche Bank’s unit sale to Pramerica. In contrast, KKR announced the acquisition of a 70% stake in Avendus, valuing the firm at $175m.

What is driving the exodus of foreign AMCs and does it present an opportunity for foreign investors to buy into the Indian equity market in general or indeed look at acquiring a smaller asset manager? Or, more dramatically, should one shun away completely? What is the opportunity cost of omitting such a large market and economy?

Investment Thesis In Brief


We suggest that India does present an interesting opportunity for asset managers, both on the mutual fund and alternative investment side. Despite the regulatory and fiscal challenges, the “I” in BRIC is still moving, although at a slower pace, for now. Exposing one’s portfolio allocation to the vast opportunity India offers, provides investors with a great excess return opportunity with some degree of volatility in the medium term. Those wanting to stand tall in the crowd may want to take a look.

To read the full PDF file including our sector inCITE, Data Analysis and Conclusion, click here.