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Green rental fees – sustainable operational costs

Office Market

On the Budapest office market, rental fees are so depressed that owners of sustainable office buildings are unable to pass on the burden of higher construction costs to their tenants. On the other hand, green tenants are not concerned about operational cost efficiency, according to real estate consultants. Developers who have no problems with financing their projects, however, anticipate a bright future.

Green offices are more expensive to build, but less expensive to operate than average ‘A’ category office buildings. Their rental fees are higher while their operating costs are somewhat lower, which makes them popular among tenants. Such an economic reasoning might sound safe anywhere in the world – but not in Hungary.

As far as the domestic property market is concerned, rental fees are so depressed that owners of sustainable office buildings are unable to put the burden of the higher construction costs on their tenants. On the other hand, green tenants are not concerned about operational cost efficiency, real estate consultants the Budapest Business Journal asked agreed.

“There are more or less three types of motivation lying behind the choice of a green office nowadays,” Dániel Pintér, the head of the office leasing division at Eston International said. “The number one motivation is corporate social responsibility (CSR). Budapest-based local executives of multinational companies whose CSR policy prescribes that only offices with green building qualifications should be rented will only rent offices with green building qualifications,” said Pintér.

Demand for green building services on the part of employees is the second most common motivation in Eston’s experience. “Younger people working at shared service centers often express their need for commuting by bike. Executives of these centers are easy to convince about this,” Pintér told the BBJ.

Thirdly, Hungarian companies will sometimes pick a green office building just because their top executives are committed to sustainable development. “We have just completed a rental agreement with HungaroControl on the renting of a 2,000 sqm office in The Quadrum, an office building complex of AIG/Lincoln in the neighborhood of the Budapest airport that received a ‘very good’ qualification from international green building qualifier BREEAM for the first time in Hungary,” he noted.

Minimizing operational costs, however, is anything but a priority among green tenants, even though scientific inquiries have proven that green buildings consume at least 20% less energy and 50% less fresh water, let alone environmental benefits like reduced carbon dioxide emissions. “The problem is that energy and other public utility bills only form a minor part of all operational costs,” said Ákos Balla, head of valuation at Colliers International. “Operational costs amount to a fourth of rental fees, while energy makes up a mere third,” he added.

On the other hand, some 60% of operational costs consists of items like cleaning and reception desk service, as well as property taxes, which are hardly affected by sustainability at all. “Therefore, savings on water and energy consumption can at most amount to 10% of average operational costs, a half of which is generally ceded to the tenants. A 5% price advantage, however, is not that appealing any more, especially if we take into account that rental costs of green office buildings are sensibly higher than those of average ones,” Balla told the BBJ.

On the rental market, A category offices are currently rented for around €11-12 per month per square meter. With a green office qualification, the same could go up to €12.5-13.5, while green technology can at most keep the operational cost advantage under half a euro.

We’ve got good news

But things will not remain like this forever. Sustainable technologies are developing: energy efficiency parameters of office buildings in the pipeline are going to surpass those in the current building stock. “Operational cost savings of our office building Green House, still under development, will amount to €2,” Ildikó Rézműves, head of the communication and marketing division of developer Skanska Property Hungary told the BBJ.

The Swedish real estate company has ambitious goals. Green House, its most recent, 17,000 sqm Budapest development on Váci út is currently applying for a Platinum qualification from green building qualifier LEED. “No other building in Hungary has ever qualified to meet such serious criteria,” Rézműves noted. As far as energy consumption is concerned, Green House will save up to 40% compared to an average building of the same parameters, while its water consumption will be less than a third of a non-green building.

Skeptics are still tough to convince about “green thrift”, though. “However impressive these buildings’ savings on fresh water are, it contributes little to reducing operational costs,” said Hajnalka Farkas, head of property management at DTZ Hungary. “Even now, water utilities comprise the tiniest bills among hefty operational cost items,” she added.

On the other hand, the direct geothermal cooling system built into Green House could save a lot for future tenants, as air conditioning is by far the most energy consuming office facility nowadays.

Competing financial strategies

When constructing a green office building, extra costs can hardly be passed on to tenants under the current market conditions. Monthly rental fees might be €1-2 higher per square meter compared to average office buildings, but that does not, however, cover the costs of high-end technical solutions. So, is it worth building a green office building at all?

“Vacancy on the Budapest office market is around 25%, which is very high,” István Kerekes, leasing and acquisitions manager at Skanska Property said. “Fortunately, figures for the submarket of green offices look much better,” he added. As far as their last energy efficient property development is concerned, the ratio of “dead space” in Népliget Center has never surpassed 20%, even during the depths of the crisis, Kerekes told the BBJ.

Top rental fees are not the only indicators of the cash-generating capabilities of an investment; the time the assets spend idle matters too. In the latter respect, green office buildings outperform all others according to property experts. “Green solutions in the construction industry are like power windows in the car business,” said Eston’s Pintér. “Yesterday they came as extras, nowadays they belong to the basic equipment, and tomorrow it will probably raise suspicion if they are not included,” he noted.

The automotive parallel is clear: sustainability forms the main trend of development nowadays. The buyer of Népliget Center confirms Pintér’s observation. “GLL Real Estate Partners has always had a preference for investments that retain their value for a long time. Energy efficient as it is, Népliget Center is just the right example of this,” Eva Weber, asset manager for the Hungarian portfolio of GLL Partners claimed.

Skanska Property is famous for developing real estate projects from its own resources, without any bank money. “Nowadays this may be a huge advantage, as they do not depend on bank loans when timing the delivery of Green House,” Balla from Colliers commented. Financing conditions have become much tighter since the crisis. By the time Skanska will finish its project, there will hardly be any competitors offering quality office space of 15,000 sqm. “In case a big client appears during the forthcoming year, they will surely bring Skanska into an excellent bargaining position,” Balla said.

As a matter of fact, there is only one possible competitor for Green House: V17, an office building by domestic developer Wing. V17 will also have a qualified green certificate (from BREEAM), it is also located along the Váci út “office corridor,” and it will also offer more than 10,000 sqm for rent. Wing, however, is 18 months late compared to Skanska. Even though it had obtained all the permits by 2009, launch of construction was continually postponed for financial reasons. Pintér told the BBJ that the project has not yet signed enough pre-leases, so it is still a question whether Wing will be able to catch up to Skanska.

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