Urban Development Funds in the JESSICA Initiative - an Emerging Real Estate Asset Class in Europe

The Joint European Support for Sustainable Investment in City Areas (JESSICA) is a policy initiative of the European Commission developed with the European Invest-ment Bank (EIB) and supported by the Council of Europe Development Bank (CEB). The primary objective of the JESSICA initiative is the use of EU Structural Funds through financial engineering mechanisms instead of grants. Managing Authorities of EU Member States have the option of employing part of their Structural Fund allocations through financial engineering instruments supporting urban developments. These instruments are Urban Development Funds (UDFs). UDFs can invest in PPPs and other projects included in integrated plans for sustainable urban development. Optionally, Holding Funds can also be implemented. They select and invest in UDFs on behalf of Managing Authorities. In this paper we discuss the key dimensions leading to an efficient design of Urban Development Funds: (1) the business strategy, (2) the feasible financial instruments and (3) efficient governance structures. By combing all key dimensions, we can derive possible prototypes for Urban Development Funds. We then compare these potential prototypes to the current implementation process of UDFs in the European Member States. The empirical analysis, which forms part of a long-term research approach (2010 to 2013) of the European Investment Bank, not only gives an overview on this emerging fund asset class in the Member States. Furthermore, it also delivers first insights concerning the strength and weaknesses of the JESSICA initiative for the private European real estate market. The derived potential prototypes as well as the recently implemented Urban Development Funds show that the JESSICA initiative could be an interesting financing alternative for private real estate investors and developers in Europe, provided that their development projects fulfill certain eligibility requirements.