Multiple Challenges Changing the way Real Estate Market Operates

Office Market

Mátyás Gereben, country manager of CPI Hungary.

For anyone who wasn’t also working during the energy crisis of the 1970s, this must be the most challenging time to do business, regardless of the sector. That is certainly the case for real estate, and is prompting a different approach, says Mátyás Gereben, country manager of CPI Hungary.

“We’re not focusing only on asset management, we’re not focusing only on a physical portfolio strategy. We’re focusing on how we will be able to sustain operations at a company that is in contact with 1,000-plus tenants and providing not only physical space but energy solutions, sustainability solutions, community solutions,” he explains.

“We’re not [just] providing physical space; we’re providing services related to how companies can maximize their know-how and their profit based on combining all these elements in their business.”

There is a multitude of challenges out there, from simply keeping tenants happy to finding construction staff, costing office fit out, and building a sustainable and ESG-compliant business. We cover all in a wide-ranging interview, but energy is perhaps the most pressing concern.

“What is clear is that energy as a product does not exist anymore, or at least not now on the Europe market,” Gereben says. “You cannot buy fixed-price energy to have a longer-term vision. Or, let’s put it another way, to budget.”

Those concerns are driving a different approach, one that probably would not have been considered even just a few years ago.

“What we are trying to figure out is whether there an option to have a proportion of this energy product, let’s assume 60-70%, coming from resources where you can determine at least a price range, or a close estimation, or, hopefully, a direct price.”

Energy Resources

Options being considered range from CPI having its own energy-producing resources (whether that’s solar panels on roofs or power plants within the portfolio) to a long-term relationship with alternative energy producers, as well as possibilities connected to the national grid itself, though Gereben describes that as “an ever-shrinking bottleneck.”

“Right now, we are in the process of creating business cases for how we’re able to put together this combination to make sure that we could become a secure energy provider, in the sense that we become a landlord where the energy-providing element is an executive option, and not a vulnerable element of the operation,” he says.

Get that right, and, presumably, it would give CPI a market advantage, I suggest. “I assume so because then you give your partners the possibility to plan ahead, to understand, and this gives certainty and security, which is probably the most needed factor in today’s business,” Gereben replies.

Energy isn’t the only headwind out there, of course. Hungary enjoys near full employment, which is another way of saying the labor market is extraordinarily tight and sourcing workforce a bottleneck across skillsets and sectors.

Changes introduced over the summer to the simplified taxation system Kata have raised fears about people leaving the labor market or going black if companies cannot afford to take them on the payroll. Those that can take them on such freelancers may need to raise prices to cover this more expensive option. Does Gereben fear an impact in the construction sector?

“Indirectly, for sure, there is an impact. At the end of our supply chains are individuals who use this taxation. In the already difficult construction market, this will not ease the price concerns we’ve been having for a long time,” he explains.

But there is also a direct effect, which affects the critical negotiation area with new tenants. Where the focus was on rental fees or service charges, today, it is on the fit-out cost.

“Until now, we provided a turnkey solution. Today, if we were to do so, there would be no profit on that piece of office area in the five-year period for which we are signing the contract,” Gereben explains.

The result is that who provides what proportion of the fit-out fees has become “a much more difficult element of the negotiation. And this is influenced by the change of Kata, because many of the subcontractors will set the prices based on the change of the taxation system, and it will not help ease this burden,” Gereben points out.

Sustainable Pioneer

The country manager says CPI has long seen itself as a pioneer in sustainable, ESG-compliant buildings. It works to the BREEAM standard rather than LEED as the former is more European in outlook, but rather than going for WELL accreditation, he prefers to concentrate on the company’s ESG rating.

“If I say we have an ESG strategy and a strong sustainability framework, I believe that today, it is a bigger tool in your hand and worth more than a standardized rating in any category. The goals laid down in direct action plans must be achieved jointly with our tenants and individuals,” says Gereben.

What goals does CPI’s  ESG framework set out?

“It states that we want to reduce greenhouse gas production by 30% and water intensity by 10% by 2030. The group has also set a target to switch to 100% renewable energy purchases by 2024 and pays close attention to selective waste collection. Overall, we have recently aligned our targets and strategy to Paris Agreement goals,” he says.

“The sustainability framework states many other important and achievable goals, like new building materials, and whenever we’re doing fit-out, we should aim for reusable elements,” he adds.

“We have very particular goals and plan, country by country, the actual actions: what do we have to do to add to this goal, what kind of actions will be taken, who’s responsible, and what are the deadlines? There’s a very big Excel sheet behind it, and believe me, we are putting in a load of effort,” he says with a laugh.

Sustainability brings us back to the energy crisis. Does Gereben believe it will drive companies to double down on finding green alternatives or, as in the case of Germany and Poland, prompt a possible return to coal? “Both” is Gereben’s immediate answer, but overall, he says he is optimistic about his industry on two grounds.

“One is that it’s actually happening because we’re all forced to confront that. Sustainability is not a ‘nice to have’ item any longer. The mindset is changing, which is very welcome. CPI has always tried to be a trendsetter in its vision of how to be future-proof or future-considerate. So, yes, there is that positive change. We can always speed it up more, and that’s what we must work on.”

Gereben adds that his optimism is also built on the fact that CPI itself is growing.

“As a result of the purchase of 76.8% of Immofinanz shares, CPI Property Group became a European leader in the commercial real estate market. Its portfolio is now valued at EUR 20.9 billion. And apart from all these concerns, I work for an organization that believes in real estate and the future functionality of real estate. And I love that and share that. So, from this aspect, I am super positive.”

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

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