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.