From the vendor’s perspective, sustainability-accredited properties attract more favorable pricing. With analysts agreeing that there is a widening gap between ESG-compliant and non-compliant products with regard to market success and a sale to an investor, a further option is the purchase of value-added assets and redeveloping and renovating them following ESG principles.

“In today’s landscape, investors use ESG as a screening method for choosing where to invest. Properties that do not have any ESG efforts or activities are passed over for projects that are dedicated to ESG and which incorporate sustainable practices into their construction,” comments Hubert Abt, CEO of Workcloud24.

ESG is, therefore, seen as significantly impacting investment markets by encouraging sustainable practices and transparency. On the investor side, this will increase demand for ESG-compliant assets, driving capital towards sustainable investments and potentially offering higher security with better risk-adjusted returns. Simply put, such properties are more attractive to investors because they command higher rents and have lower vacancy rates.

“ESG considerations are increasingly shaping investment decisions, with investors and stakeholders favoring properties that demonstrate strong sustainability credentials,” comments Tamás Balogh, counsel and real estate service stream leader at DLA Piper Hungary.

“Projects that comply with ESG standards are often easier and more cost-effective to finance due to their lower risk profile and alignment with investor values. This shift is expected to lead to a premium for ESG-compliant assets in the investment market,” he says.

Standardizing Certificates

“Another impact is the trend towards standardizing energy performance certificates to ensure transparency across the EU. The long-term benefit of sustainability principles is to increase the value of the property, and energy-saving factors are now often considered a deal breaker by the majority of landlords, investors and tenants,” Balogh adds.

One of the most notable deals last year was the acquisition of the 27,000 sqm Leed “Platinum” certified H2Offices Phase I by the Hungarian Erste Real Estate Fund from the property’s developer, Skanska.

“The projects of Skanska Hungary offer top-quality office spaces in great locations, which ensures success and satisfaction for tenants and investors. All the investments of Skanska Hungary will undergo a Leed, Well Core & Shell, and Well Health-Safety Rating certification process, confirming their compliance with the principles of sustainable development, optimal energy consumption, as well as a safe and superior work environment,” says Veronika Themerson, center of excellence director for environment at Skanska CEE.

“Introducing ESG aspects to real estate cannot be considered solely from the cost perspective without considering the benefits. More and more companies are looking for properties that provide the highest standards of quality of work for their employees while minimizing the impact on the environment. Investors are also looking for assets that are prepared for future predicted climate change and changes in legislation,” she adds.

In another significant office transaction, Atenor sold the 15,500 sqm Breeam “Excellent” rated RoseVille office complex in Budapest to BXR, a London-based fund making its debut in Hungary.

“The main focus of investors is to secure income for the long-term, while the environment around us is changing continuously. Not only the climate, but the technologies and the legislation are changing as well; therefore, sensible investors are better off considering the future in their investment decisions than maximizing immediate income,” comments Norbert Schőmer, country manager at Atenor Hungary.

Cost Concern

One significant concern of developers and investors is the perceived higher costs of ESG and sustainability-accredited development as required by the EU Taxonomy.

“ESG investments impose substantial costs on market players in the short-term. The renovation and retrofitting of properties to meet energy efficiency and ESG standards require significant investments that tenants, owners, and buyers are often reluctant to make due to economic rationales. Consequently, EU-wide regulations are needed to expedite this process by mandating specific requirements and, more crucially, measures to curtail environmental damage,” argues Tibor Ruzsinszki, head of asset and property management at Gránit Alapkezelő Zrt.

These cost concerns underscore a need for improved and addressable data that boosts transparency, reduces greenwashing and promotes sustainable investments.

“Due to the EU’s SFDR [Sustainability Finance Disclosure Regulation], investors must now factor in sustainability risks when making investment decisions. Companies can face environmental, social, or governance challenges that could negatively affect investment returns. Investors can select investments based on their sustainability preferences by evaluating the sustainability risks associated with each investment,” says Edina Domokos, business development and strategy analyst at Gránit Alapkezelő Zrt.

“Mandatory sustainability reporting, as mandated by EU regulations, will provide a clear picture of companies’ and suppliers’ sustainable operations, enabling investors with sustainability preferences to make informed decisions. Companies taking steps towards sustainable operations will be able to attract more funding from investors, creating a competitive landscape,” she adds.

ESG considerations are increasingly shaping investment decisions, with investors and stakeholders favoring properties demonstrating strong sustainability credentials. Projects that comply with ESG standards are often easier and more cost-effective to finance due to their lower risk profile and alignment with investor values. This shift is expected to lead to a premium for ESG-compliant assets in the investment market, concludes Balogh.

This article was first published in the Budapest Business Journal print issue of September 6, 2024.