ESG and Financial Issues Have Dual Impact on Commercial Real Estate

Office Market

The H2Offices complex in the Váci Corridor in Budapest. Skanska says it is being designed and developed with ESG principles in mind.

ESG criteria are increasingly utilized in the real estate sector from development and investment perspectives. The industry is expected to combat CO2 emissions, reduce energy and resource use, and increase the share of sustainable construction materials, but that is far from all, real estate editor Gary J. Morrell writes.

Owners also need to react to demands from tenants and building users for the provision of buildings that enhance well-being and are integrated into their surroundings by providing a mutual benefit for the development and the immediate neighborhood; for example, through the use of local amenities by office staff and green areas and restaurants that are open the wider public.

These issues are essentially non-financial, but throughout the development process and lifespan of a property, market and environmental issues can have a further impact. Returns on investment and sustainability aims can be seen as part of the same desired result: lessening the negative environmental impact of real estate and related industries while simultaneously creating a framework of governance, accountability, and benchmarking.

“ESG is an important value driver for the real estate sector as investors have an increasing focus on sustainability. Awareness, in general, is continuously growing within society, and the real estate sector is, of course, also part of this,” says Zsombor Barta, president of the Hungarian Green Building Council (HuGBC).

“Real estate can have a significant social impact beyond the well-known and often thematized environmental footprint. Therefore, the social element of ‘S’ is getting into focus, as well as the ‘E.’ And in order to manage and integrate all of these aspects properly, the governance ‘G’ part of the real estate stakeholder is important as well,” he explains.

“Sustainability has become increasingly vital to real estate investors, and the governance ‘G’ part is showing how all of this is properly managed and implemented within the processes and decision-making structures; therefore, this is equally important,” Barta says.

“Investors, especially in class ‘A’ assets, need to fulfill many requirements and, more importantly, the implementation of [financial] risk mitigation measures are very high on the agenda. Although ESG has become a new and frequently quoted phase, sometimes an almost mysterious phrase, generally the ESG topics have been known for several years,” he notes.

“Risk mitigation was always in the focus of investors, also the reduction of negative environmental impacts. Therefore, although ESG criteria are often seen as new, the basic requirements are already known. However, the related ESG regulations and reporting requirements are, indeed, quite new and need to be fulfilled accordingly,” Barta concludes.

Framing a Healthy Environment

Regina Kurucz, architect and qualified Well assessor, sees ESG as a framework for a healthy environment.

“We must make protecting and promoting health every bit as essential as environmental, social, and governance principles for any business looking to win favor with customers, investors, and employees,” she says.

“It’s time to add an ‘H’ to ESG,” Kurucz adds. “Research consistently shows that a focus on employee well-being boosts stock performance. By helping to boost productivity and well-being, healthy building solutions can yield significant economy-wide financial gains.”

Ambitious international and national developers are constructing green-accredited buildings throughout their regional and national portfolios. Skanska is committed to developing its office projects in line with both Leed and Well accreditation. CTP aims for Breeam accreditation across its regional and industrial portfolio.

Skanska has completed the first 27,000 sqm phase of its 67,000 sqm H2Offices in the Váci Corridor in Budapest.

“Our office building was designed and developed with ESG principles with a focus on users in mind, and a high emphasize on connection to nature,” said Amarilla Cseke, leasing and asset manager at the Skanska Hungary’s Commercial Development Unit. The complex includes green roof terraces, a roof-top running track and green areas. 

In some respects, refurbished older buildings are more sustainable since there is less need to produce and transport materials (concrete, for example, which has a massive environmental impact), argues Edina Hornok, sustainability manager at the architects and construction managers DVM group.

Limitation and Potential

“So, there are limitations but also potentials in a refurbishment project. Sustainability is affected by the level of refurbishment: if the envelope of the building is improved, through new glazing and insulation, and also new, efficient building services are installed, the building can achieve a high level of energy efficiency,” she notes.

“There are many good examples of sustainable refurbishment projects; for example, the Eiffel Palace in Budapest, which received both Leed and Breeam certification,” Hornok adds.

Another central concern of tenants is energy usage. Atenor says it is committed to Breeam “Excellent” sustainability accreditation and Accees4you throughout its regional portfolio. Its latest Budapest project, the 15,500 sqm RoseVille in Budapest, has a triple “A” energy rating that includes electricity and gas from green sources, heat pumps, and solar panels, says Máté Galambos, head of leasing at the developer.

Hornok says architects have a role in helping investors achieve their ESG targets and can design valuable buildings that benefit the environment and the users.

“They can mostly influence the ‘environmental’ and ‘social’ components of ESG. The practices they use need to be changed: they have to focus on energy efficiency and net-zero emission, building cohesion in communities, and rehabilitation of public spaces. They need to learn to use different sustainability tools such as LCA [life cycle analysis] or energy simulation software.”

Kurucz agrees and emphasizes the importance of architects in the design and operation of buildings in line with Well principles.

“Architects and interior designers have a huge impact on how we behave in the spaces, how we get around, how we feel, how we decide. And this impact means responsibility. Responsibility for health, mental state, and culture of the occupants,” she argues.

“Architects feel relieved when a building is finished and occupied because their work is done. In reality, the life of the building starts with the occupancy, and architects have to understand and foresee the operation and maintenance issues of their design. They have to design the whole lifecycle of the building and prepare the building for the circular economy,” she concludes.

This article was first published in the Budapest Business Journal print issue of February 10, 2023.

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