Tackling Europe’s housing crisis

Uxolo (UX): Rolf, could you tell Uxolo’s readers a bit about the CEB’s background and mandate?

Rolf Wenzel, Governor of the CEB (RW): We were set up in 1956, which makes us the oldest European financial institution—two years older than the EIB. We’re based in Paris and have around 200 employees. We were set up by eight countries—France, Germany, Italy, Belgium, Luxembourg, Iceland, Greece, and Turkey— who saw the need to establish a financial institution to provide European countries still suffering from a lack of social infrastructure after the war with cheap financing and technical expertise.

Our mandate is to promote social cohesion by providing financing for social infrastructure. Social infrastructure at the time of the creation of the bank was of course housing, because many European cities were heavily damaged in the war. There was also a need to build other key infrastructure such as hospitals, schools, nurseries, etc. And that mandate has never changed. Over the years our membership has grown and today we have 42 member countries, including all the largest European countries bar the UK and Austria.

Of course, over the last 60 years the focus and emphasis has shifted somewhat. After the financial crisis in 2008, we focused more on supporting the creation, maintenance and preservation of jobs and MSMEs, which still makes up a lot of our loan portfolio. Social housing makes up around a third of the portfolio. We also do a lot for migrant and environmental issues. And this year we’re obviously very focused on the response to COVID-19; we forecast that by the end of the year we will have increased our loan approvals by 50% as we finance the response to the pandemic—primarily for the healthcare sector (masks, ventilators, and so on).

UX: How is the bank funded?

RW: We issue bonds to refinance our operations. Member countries that join the bank pay into it only once. The capital share is based on their ability to contribute, i.e. their GDP and population. So around 11% of the bank’s resources is actually paid-in capital. France, Germany and Italy are the largest shareholders with 16.7% of the capital. The next largest shareholders are Spain and Turkey, and those top five countries hold around 70% of the bank’s capital.

We can raise funds cheaply in the international markets because of our AAA rating and the backing of our larger shareholders. In April we issued a COVID-related social inclusion bond, following on from our first social inclusion in 2017. Obviously any bond we issue is a social bond because of our mandate, but there’s been a lot of greenwashing going on so our international investors wanted more clarity on the social impact through transparency, accounting, third-party oversight, etc. And this is why the International Capital Markets Association (ICMA) developed some guidelines to that end, and we were part of the working group who helped develop them. Following that, in 2017 we issued a €500 million seven-year maturity bond, with the specific stipulation of using the proceeds for education, SME support and social housing. And we did that three-years in a row: in ‘17,’18, and ‘19.

But when pandemic hit in April, we saw a strong demand from borrowers for COVID-related expenses. So we went to the market and issued a COVID-related social inclusion bond and it was a great success. In the end we raised €1 billion and it was five-times oversubscribed. International investors are really showing lots of interest in this growing market segment. Social and environmental issues are a lot more important than they were a couple of years ago and that really benefits our ability to raise funds.

UX: Could you expand on the social housing projects that are being financed in Stuttgart and the social impact they might have?

RW: Roughly €16 billion of our portfolio is dedicated to social housing. Our mandate, agreed by shareholders last year, asked us to not only support the sovereign states but also the big cities. When you look at Stuttgart, one quarter of the population is of foreign origin. Like Hamburg, Munich, Berlin and Cologne, Stuttgart is a fast growing city, and that creates a problem for social infrastructure: housing, schools, traffic congestion, and so on. That’s where the real problems are in Europe at the moment, the growing metropolitan areas, so that’s where we decided to focus our support. 

Cities like Stuttgart and Leipzig are growing cities that have their own housing associations that are charged with both modernising existing housing stock, and making them energy efficient, and building new homes for low-income tenants. Stuttgart is in a region with a strong manufacturing industry, and that has attracted a lot of migrants. And they’re looking for affordable housing. So we’re lending to the housing association at competitive rates, and there’s a law in place that makes sure that only applicants with incomes below a certain level can access that new housing.

Two weeks ago, there was a big demonstration in Stuttgart—which turned violent—because there’s a severe housing shortage. For some years now the population has been growing, so the city’s administration has been desperate to both create new housing and to rehabilitate existing housing stock to make them energy efficient—so people have more money in their pocket for other things than their energy bills.

UX: Could you elaborate on the terms of the financing?

RW: As a social development bank, we’re limited by our shareholders how much margin we can put on top of our own financing costs. The margins that we charge depend on the borrower’s rating and the risk of the project. For example, if we’re working in Germany—a highly related country—the margin will be very low because a city like Stuttgart has a lot of alternative avenues for financing. In poorer countries, our financing will be more concessionary but will never go below our cost of funding. But in any scenario, we’re still cheaper than the borrowers going to the market themselves.

The maturity depends on the kind of borrower. If we support SMEs by financing national development banks or financial institutions, we don’t want them to extend a loan beyond the maturity of the financing they’re receiving from us. For example, in Poland we lend to PKO or EFL and they lend on to SMEs on seven-year tenors. So that’s exactly what our maturity would be — with or without a grace period. If we finance social housing, the maturity is for up to 15 years. But again it depends very much on the needs and rating of the borrower.

We also make sure we pay out in tranches. At the beginning of the project, we’ll pay around 20%. Then when we see construction start, we pay the next 20%. That’s so if we see a problem, we can stop the payments until the problem is remedied.

UX: What are the challenges involved in putting such a financial package together?

RW: In respect to ensuring European standards as far as procurement and technical standards are concerned, there’s no need for discussion as people know it—the standards are agreed by the EU and borrowers know them. So that’s not often an issue.

That is sometimes different when we move further to the East, for countries that are outside the EU. But in those cases we can also provide technical expertise of how to apply the appropriate standards. But the same thing does often apply when lending to cities, where there sometimes a lack of sufficient technical expertise or administrative capacity to implement a large-scale real estate project. And that’s where we can provide technical assistance funding to finance local consultants who can be on the ground to make sure everything goes smoothly.

UX: Could you tell us a bit about the wider housing crisis in Europe at the moment?

RW: What you’re seeing in many European cities is a situation where people with full-time jobs can’t pay their rent because the prices have gone up so fast. That might be the case because the city is deemed to be very attractive, with all desired cultural hit-points, the fast broadband internet connection, the jobs that people are looking for etc. And so everyone moves to the city and that creates problems with public transport, pollution, and quality of life more generally.

And this comes at the expense of the suburbs and the regions, because they empty out and public services are cut down because there’s no-one there. Then there are no jobs on offer, and it’s only the elderly who are left in these places.

Europe-wide, major cities have become congested and the rent has become unaffordable even for people who make a decent salary. For example, in Lisbon, we’re working with the local housing agency and the mayor to help deal with this problem. There’s a lot of foreign money coming into the city, particularly into the historic centre, and that pushes up prices and rents. It’s still cheap for the French, Spanish and others to move there but it’s becoming too costly for the locals, who have to move out. That also creates social tension and it gives some serious challenges to the local administration to respond to, but there’s no easy solution. So we’ve worked with the housing agency to help both restore the historic city centre and create affordable social housing at the same time.

UX: What can development banks do to help alleviate the crisis?

RW: Housing has always been an issue that could create tensions for local administrations if the quantity and quality of housing isn’t made available. That originally led to creation of housing agencies, mandated to ensure everyone has access to housing, nurseries, shopping centres, etc, in their own neighbourhoods. But those needs change, and you can win and lose elections if you don’t respond to those changes. It’s one thing to realise that things are changing, but’s another entirely to come up with solutions for that change. There are legal restrictions, you need the space, you need to consider building high-rise buildings rather than lower ones, and so on, and these all require political decisions.

And of course we, as a public institution, like the national and city housing agencies, have a role to play providing not only our financing but also our expertise— the solutions we learn in one country, we can transfer to others.

UX: Are there any particular financing instruments or mechanisms that are particularly relevant for that endeavour?

RW: We can finance the project with a straight loan by lending directly to the housing agency for, say, a project creating 500 new apartments. We could also lend under a ‘public finance facility’ and leave it to the borrower to decide during the implementation how much of the loan would go to housing, how much would go to nurseries, to schools, to energy efficiency, and so forth. So that’s a fairly flexible loan, but of course we monitor that the money is spent only on things with social value.

For these fairly straight-forward projects, we finance them on our own. And sometimes when the project is more complicated or very large, then we co-finance them. For example, we’re currently doing a project in Turkey with the EIB.

UX: What are the CEB’s plans for supporting the social housing sector going forward? Do you have any particular targets?

RW: We don’t have any specific targets for supporting the sector, but we just make sure that any project undergoes significant due diligence to determine whether it’s of sufficient social value. It could be a SME/MSME project in a country like Bosnia-Herzegovina, or it could be a housing agency in a big city like Stuttgart—we judge the social value and risk on a case-by-case basis.

UX: Are DFIs increasingly being turned to as solutions providers to the more obvious private-market failures related to the social and environmental crises that have developed in recent years?

RW: With the COVID-19 crisis lingering on and countries coming to an end of what they can do financially for their own economies, they’re looking more closely at the roles that DFIs can play in that respect. We can do a lot and clearly in the future we’re going to be asked to play a bigger role. There’s a role for DFIs to play in maintaining employment, supporting SMEs and financing essential things like social housing. However, that would also need to go hand-in-hand with increasing the capital endowments of the DFIs. We have a good rating but that relies on the strong support of our shareholders. If we’d want to do things at a larger scale, we’d need to have an equivalent increase in our capital to achieve that.