EU Taxonomy and Real Estate Investments

Office Market

Academia office building, acquired by investors with ConvergenCE acting as asset managers.

As evidenced by recent CEE commercial office transactions, ESG investing (the integration of environmental, social and governance factors into the acquisition and exit process) is increasingly a concept adopted by investors as a central pillar of their investment strategies. Pressure to do so comes from shareholders and legislators and a wider need to be seen to be investing sustainably.

Building owners and developers, therefore, need to adopt a longer-term sustainable strategy to have the option of an exit strategy with a sale to an investor. With ESG, the priority up till now has tended to be on the “E” for environment, for example the use of green energy. Sustainability and financial issues are seen as moving closer together with energy efficiency, in the view of many analysts. 

“You cannot really do an RE investment deal nowadays without implementing ESG-related criteria. EU Taxonomy is a major ‘game-changer’ on the EU Market, as this criteria framework defines sustainable business activities within the EU,” says Zsombor Barta, president of the Hungarian Green Building Council (HuGBC), on the role of sustainability issues in the investment process.

“Only those who can demonstrate compliance are eligible for financial benefits. Sustainability means the reduction of financial risks as well. Therefore, I would say there is no other way than sustainable solutions, and this is now also one of the key factors when it comes to investments,” Barta argues.

Colliers estimates regional year-end investment volumes will reach EUR 9 billion-EUR 10 bln for 2022. The total for Hungary for this year is expected to be around EUR 1.2 bln in the view of consultants. The total investment volume for 2021 for Central European (which for Colliers encompasses Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia) was EUR 11.7 bln.

“I think that social and governance is more indirect, but investors are putting in place a program to make an asset compliant with SG regulations,” says Benjamin Perez-Ellischewitz, principal at Avison Young Hungary.

“This is still quite early in the Hungarian and Central European markets. ESG and EU taxonomy reports are now expected to be part of the information pack by some investors when presented with an acquisition opportunity,” he notes.

Sustainability Expectations

Investors obviously have yields and their return on investment as a central priority, although a commercially successful investment grade building tends to have attained sustainability accreditation. Sustainability expectations are now integral to the leasing process and asset management.

Indeed, the argument could be made that almost all assets at the higher end of the office and industrial sectors in Central Europe are now sustainability accredited and market pressures are, therefore, acting in parallel with sustainability regulations.

“ESG in Hungary is currently less of a buzzword than in the Western hemisphere,” comments Zsolt Jakab, portfolio manager at Diófa Asset Management. “The main reason is that local investors focus more on yields than, in some cases, distant targets represented by ESG. As a developer, it is much harder to omit ESG, as potential buyers could easily come from outside the country.” He argues that more standardized regulation will definitely help wider adoption.

Investors need to look to a longer-term rise in the value of an asset and the prospect of new national, regional, and international sustainability regulations being implemented. ESG investment strategies in all areas are seen as necessary to combat climate change and pandemic protection measures. In this way, building owners must expect constant regulatory changes and adapt their products and practices accordingly.

“As of now, ticking the ESG boxes as a developer is essential, but the emphasis is on the assets’ sustainability features and ‘future-proof-ness’ in real estate investment deals. Investors need to think of their future exit, as outdated assets are and will be more difficult to dispose of. Therefore, the market is definitely shifting towards a more sustainable mindset,” comments Máté Galambos, leasing manager at Atenor Hungary.

The prolific regional developer has a policy of developing large-scale, phased developments and selling on to investors once an asset has been completed and is substantially leased.

ESG elements are increasingly influential in the investment market, agrees Csaba Zeley, managing director at ConvergenCE, the developer and asset manager.

Walk the Walk

“However, as with ‘greenwashing,’ investors and tenants are quickly realizing that there is a big difference between ‘talking the talk and walking the walk.’ In other words, ESG should only really be part of the market where it is appropriate and effective,” he says.

While ESG reporting is not yet mandatory for all listed companies, GTC has been preparing them for two years and became the first commercial developer in Central and Eastern Europe to publish an ESG report in June 2021. Moreover, ESG standards have been an essential criterion for GTC in making project-financing decisions for many years. This has a substantial impact on investor interest in supporting sustainable businesses, according to the company.

Financing is also ever more connected to sustainability criteria compliance. If developers can prove compliance with EU taxonomy, financing or re-financing will be more likely and much more straightforward.

However, Barta of HuGBC pointed out the danger in owners trying to keep pace with demands that tenant specifications change and be updated, as this requires a lot of resources in materials, labor, and energy and generates waste.

“ESG is increasingly higher up the list for investors and developers. This is partially driven by changing attitudes on responsibility towards the impact of real estate on the environment, but also by increasing requirements on the financing and reporting side of things that will ultimately impact the feasibility of business models going forward,” concludes Kevin Turpin, regional head of CEE at Colliers.

“But we also see sustainability and green ratings moving from a ‘nice to have’ to a ‘must have’ for various players active on the market, in particular from tenants and banks. This means that investors and developers will need to react and adapt if they want their buildings to continue to be competitive and attractive in the future,” he adds.

This article was first published in the Budapest Business Journal print issue of September 23, 2022.

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