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Countries in the transition region inherited a commercial, logistics and residential infrastructure which suffered from decades of under investment and was not geared to the demands of a market economy.
As the provision of modern real estate infrastructure is essential to support the region’s transition and economic expansion and diversification, the activities of the Bank in the property sector are aimed at complementing, enhancing and creating synergies with the core competencies of the Bank, in particular by building an efficient platform for enterprises and municipalities, whilst applying a high selectivity as far as sponsors and projects are concerned.
The key transition challenge in the property sector is to support the market-oriented development and renewal of real estate and the creation of the necessary institutional environment. Through its involvement in property and related markets, the Bank promotes the creation of market-based mechanisms to ensure that demand and supply for property are well balanced, the development of a liquid secondary property market, the strengthening of the legal framework for property as well as the application of international best practices in terms of integrity and environmental, social and energy efficiency standards.
Beyond the scope of the global crisis which affected severely the real estate sector in the Bank’s countries of operations, the region remains fundamentally under supplied with modern, high-quality commercial, logistics and residential real estate, particularly when such increasingly critical considerations as climate change and energy efficiency are included. Long-term demand in the sector is underpinned by two forces: the growing need to replace the region’s existing, dilapidated real estate stock on the one hand and its positive, long-term economic growth dynamics on the other. These forces will continue to create strong demand for new, high-quality buildings across the region.
Over the strategy period, the Bank will aim at making a difference by initiating or increasing the range of its operations in countries where transition gaps remain large, achieving a presence in several property sub-sectors in countries with medium transition challenges, and selecting projects with a particularly high demonstration effect in the regions of Russia and Ukraine.
In the short-term, liquidity shortage (in both debt and equity) constitutes a key challenge to facilitate the completion of selected projects, provide support to situations of distress and allow commercially viable pipeline projects to be re-launched. The Bank’s immediate priority is therefore to back financially viable projects whose development has been interrupted by a withdrawal of financing, particularly in regard to its existing clients. With the ultimate aim of restoring the region’s real estate markets to activity and liquidity, the Bank is also seeking ways to support the emergence of distressed asset markets and investor restructuring.
Over the recovery period, the Bank will pursue financially sound investments with high transition impact and clear additionality, selecting sponsors with the highest integrity standards and products that better address the region’s transition gaps, such as logistics centres, technoparks, regional hotels or the institutional strengthening of the construction industry, with an appropriate mix of direct financing and indirect investment activities through real estate funds. In so doing, it will continue to apply its project finance model at the forefront of real estate market transition, in cooperation with leading domestic and international developers, and supporting real estate projects with a visible demonstration effect. The carefully selected projects will need to address tangible supply and demand imbalances, and promote technology skills transfer as well as international business standards.
In pursuing the core operational objective mentioned above, the Bank will place special emphasis on sustainable market development and climate change mitigation:
• Sustainable market development through institution building and innovation
High standards of integrity and an adequate and enforceable legal and administrative framework are vital for the healthy development of property markets. Although progress has been made, the level of development is unequal across the countries of operations. Complex administrative requirements, e.g., in the context of property registration, zoning and building permissions are often at the root of corruption, and legal gaps create significant uncertainty. By preventing the involvement of players unwilling or unable to bear the associated risks, supply of quality real estate assets does not meet demand, which in turns affects market-based pricing. The Bank will continue to use all its investments – whether direct or indirect – to promote the highest standards of business integrity. Furthermore, it will engage selectively in policy dialogue, mainly at the project level, with the real estate community, including investors, developers and authorities, to identify and address shortcomings in the institutional environment for property development.
The existence and depth of secondary markets is an important investment consideration for real estate investors and developers, who would typically seek to realise their investment after a few years, especially in the case of a development. This in turn requires an increased participation of institutional investors, international but also domestic. The creation and deepening of secondary markets will continue to constitute a key element of the Bank’s objectives. By participating mainly in sector specific equity funds but also in pre and post IPO property companies and real estate developers, the Bank can lead the expansion of secondary markets in the region and help create greater liquidity in real estate markets.
• Climate change mitigation through energy efficiency
At present, a number of the world’s most energy intensive economies are located in the EBRD region. Within this context, the built environment is estimated to account for around 39 per cent of final energy consumption in the region, mostly through heat, and is thus the largest single opportunity for energy efficiency. To address this challenge, the Bank will assess systematically the scope for energy efficiency across all operations. By assisting in the dissemination of energy efficiency best practice, introducing/upgrading energy efficiency standards and transferring skills and know-how, the Bank will aim to act at the forefront of the region’s broader climate change mitigation efforts, employing commercially viable, available technology and practice to achieve major energy savings.
Throughout its operations in this sector, the Bank will focus on geographical diversification. The Bank will progress further into the Western Balkans, Eastern Europe & Caucasus, Central Asia and Russia and where possible and appropriate, into secondary cities with the aim of creating new, high-quality stock across all sub-sectors. In less developed countries, continued involvement in capital cities remains justified. Furthermore, especially in the ETC region, small scale projects will remain an important component of the Bank’s work and will be mostly carried out through dedicated vehicles.
In line with its mandate, the Bank will continue to support actively environmentally and socially sound and sustainable development in all its investments. Urban regeneration projects that revitalise dilapidated areas will constitute a particular area of interest in this context.
The attached Property Sector Strategy proposes overarching priorities that aim to address the remaining transition challenges in the sector. A level of flexibility will be needed to enable the Bank to respond effectively to the transition needs of each country in a context where the medium to long-term impact of the global crisis remains uncertain.
Last updated 28 April 2010