Whether talking about a development, redevelopment, renovation or an investment project, institutional (and, increasingly, private) investors are expected to justify the ESG elements of an asset to their board, shareholders or ownership.
Further, continuous proof of ESG elements and procedures is needed for EU Taxonomy purposes, involving an efficient and accurate accounting process that is transparent, easily accessed and verifiable by a third party.
“The most significant challenge developers are facing is the uncertainty of the divestment, especially arising from the lack of international institutional investors. In addition, what affects all sectors are the high financing costs, although there is some easing in the continued elevated construction and labor costs,” comments Kata Mazsaroff, managing director of Colliers Hungary.
“In the logistics market, there is healthy demand, as opposed to the office market, where we still see a slight uncertainty in occupier demand. The moderate demand from the retail sector, combined with declining corporate and household consumption, could contribute to uncertainty,” she says.
“There is a growing interest in the hotel market for development opportunities, significantly fueled by the recovery in international tourism. This trend may continue to drive demand not only for lower-category hotels but also for higher-category ones,” Mazsaroff adds.
Multiple stages of the real estate development process are impacted by EU Taxonomy and ESG expectations, says Zsombor Barta, ambassador to the Hungarian Green Building Council (HuGBC). He lists them thus:
Planning and design: incorporating sustainable materials, energy efficiency, and biodiversity protection.
Construction: ensuring minimal environmental impact, reducing carbon emissions, and waste management.
Operation and Maintenance: energy performance monitoring, water management, and health and safety protocols.
Financing and Investment: aligning with green finance criteria and sustainable investment principles.
The influence of EU Taxonomy and ESG expectations extends beyond the office and logistics sectors, where ESG elements are already established, and they are now significantly impacting areas such as residential real estate, retail, hospitality, and healthcare.
“The real estate industry has a lot to do in terms of implementing the principles of sustainable development,” comments Veronika Themerson, center of excellence director for environment at Skanska CEE.
“First of all, the construction process should be viewed holistically in terms of the possibility of implementing the principles of sustainable development, starting from the selection of the plot for investment, the selection of the leading and accompanying functions, construction and finishing materials, the method of construction, up to the configuration of the building and providing instructions to the users on how to use the facility in the most optimal way,” she explains.
“Only the joint actions of the investor, designer, contractor and user, based on shared values of supporting the planet, bring the most beneficial solutions. This requires trust and dialogue between stakeholders from the earliest possible stage of implementation,” Themerson says.
ESG-compliant developers and investors are more likely to thrive in the future market as regulatory requirements, investor priorities, and consumer demand increasingly coalesce in favor of sustainable practices. Those who fail to adopt ESG standards may struggle to attract funding, face regulatory hurdles, and lose market share, all of which make compliance critical for long-term survival and competitiveness.
“New ESG expectations will be financed through a combination of green financing options, such as green bonds, sustainability-linked loans, and ESG-focused investment funds,” predicts Barta of the HuGBC.
“Governments and financial institutions are increasingly offering incentives, tax benefits, and lower interest rates for sustainable projects. Additionally, developers and investors will seek private capital from institutional investors who prioritize ESG criteria, while regulatory frameworks like the EU Taxonomy will guide capital flows towards compliant, sustainable ventures,” he argues.
Hungary has generally been regarded as an attractive investment destination as it provides a significant yield premium on both Western Europe and Poland and the Czech Republic (the two biggest markets in CEE) for investors seeking high-quality, fully-let sustainable assets with a price premium. However, investors are now adopting a wait-and-see approach towards the country with the ongoing yield correction and resulting low liquidity.
“In terms of investment, the most preferred and sought-after assets, apart from industrial properties, are new office buildings developed in good locations that prioritize sustainability and energy efficiency,” says Colliers’ Mazsaroff.
“ESG-compliant office buildings typically exhibit lower vacancy rates and higher rental fees compared to the market average, ensuring stable cash flow. Therefore, they and other ESG-compliant assets can ensure profitable operations in the long term, making them a clear priority in investment decisions,” she notes.
Avison Young estimates yields for Hungary at 6.75% for prime office, 6.75-7% for prime industrial, and 7.5-8% for strip malls.
“ESG-compliant developers and investors are more likely to thrive in the future market as regulatory requirements, investor priorities, and consumer demand increasingly favor sustainable practices. Those who fail to adopt ESG standards may struggle to attract funding, face regulatory hurdles, and lose market share, making ESG compliance critical for long-term survival and competitiveness,” concludes Zsombor Barta.
Analysts see an increasingly positive impact on the different real estate segments; market influences and ESG are connected (and pulling-pushing in the same direction), and, therefore, all parties are in a potential “win-win” position.
In this way, the more deeply entrenched ESG elements and processes are in a project, the more the various stakeholders can benefit and the greater the returns for the financial stakeholders.
This article was first published in the Budapest Business Journal print issue of October 18, 2024.
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