Renovation or new green building – which will be a more rewarding investment? As ESG considerations come to the fore, this is an increasingly common dilemma of the real estate market.
There is a great deal of interest and demand for green buildings from both investors and tenants, but in many cases, it is not clear which properties can be considered green and which cannot. The 2021 EU taxonomy is meant to clear the picture by helping to classify investments in terms of sustainability. The aim is to make it transparent to financial institutions whether a project can really be considered green – fmbusiness.hu writes with reference to Portfolio.
In terms of financing
The biggest challenge for the banking sector is the transition to a sustainable economy, a significant part of which is the renovation of buildings that are not yet environmentally friendly. In Hungary, 40% of corporate financing is covered by commercial real estate, but 75% of European real estate is not yet energy efficient. That is why the financing sector is facing a big challenge, as the transition cannot be achieved solely by new, sustainable buildings, and the reconstruction of existing, well-equipped but not yet green properties will become of paramount importance.
As György Szege, head of the ESG department of Magyar Bankholding Zrt., told Portfolio, the greening of existing buildings according to ESG aspects could be EUR 7,000 billion across Europe. Counting with a roughly 25-year period this means that the annual cost of renovations is around € 300 billion, which will likely be financed by banks. Gábor Borbély, head of the financing practice of DLA Piper Hungary, also considers banks to be important catalysts of the transition to a sustainable economy.
Costly but seems to be worth it
Greening buildings is expected to be costly but seems inevitable. However, it is worth considering other aspects, as the construction of new, green properties is not cheap either. New green builds cost on average 7.4-9.4% more than the not sustainable ones. It also should be taken into account that by maintaining the foundations of old buildings and reconstructing them large amounts of construction waste can be avoided, so the adverse impact on the environment is significantly lower.
Another noteworthy factor is that in recent years, green-rated buildings have been bought and sold at an average of 21.4% higher prices, and owners have been able to charge 11.1% higher rents for LEED-rated properties. Thus, in addition to reducing the energy consumption of buildings and reducing CO2 emissions, the higher available cash flow is expected to offset the costs of greening.