In the era of "de-coupling, de-risking, de-leveraging" (the age of 3 x DE), the vertically segmented operation of Asset-Property-Facility Management service providers in the globalized Fund Management industry creates an illusion of control and transparency. However, the cost of this segmentation is significant information and efficiency loss. The time has come for vertically integrated real estate developers, managers, and operators.
The ESG (Environmental, Social, Governance) criteria enforced by the EU put immense pressure on this fragmented and inflexible system, and consequently, on the entire real estate market:
- Environmental:
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- The EU regulations currently induce only self-financing, energy cost-saving projects because the real estate market is simultaneously burdened by high interest rates and high energy costs. Therefore, investment coverage at the project & portfolio level remains only for cost-saving, self-financing projects.
- Real estate portfolios that respond to EU ESG regulations with digitalization and investments resulting in energy cost savings are forced to operate at a higher investment cost level but compensate for this with energy savings and interest rate or insurance discounts.
- The effectiveness of investments is fed back to investors through energy certification and its evaluation by authorities and banks, partially offsetting the extra costs of compliance. With energy and digitalization investments, the physical energy demand of certain buildings can be reduced by up to 50% from pre-2020 levels, but this increases the mechanical-regulatory complexity and digitalization of the property, requiring high-level expertise.
- Social:
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- The EU ESG expectations encounter constantly changing tenant-user expectations since Covid. Employee behavior has fundamentally changed with the forced home office, turnover is increasing, employee retention has become a priority, and the need to ensure an ideal working environment has replaced the minimization of total real estate costs per capita.
- This demand extends not only within the office but also to its surroundings. The proximity of schools, dining, sports, shopping, and administrative facilities is considered along with the internal quality of the office. Companies choose offices with the awareness that employees also evaluate the company based on its headquarters. Thus, ESG social criteria balance the efficiency conditions represented by the ESG environmental criteria.
- Governance:
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- Regulatory expectations appear in the lives of real estate professionals through central bank requirements imposed on investors, financiers, and insurers involved in real estate projects. Sustainability objectives have created a new industry, the energy or ESG certification companies.
- These new documentation requirements further increase administrative costs, the efficient economic scale, and the complexity of managed processes and requirements. EU-Governmental-Municipal regulations and recommendations change so rapidly that adaptation has become extremely costly.
- Local regulations and planning already allow for development aligned with community interests, but the availability, absence, and priority of government-municipal resources, changing with political cycles, can cause decade-long delays in community infrastructure and public transport developments.
The ESG criteria split the real estate market into portfolios that meet and do not meet international standards. "Compliant" properties and portfolios receive favorable loans, insurance, and can be chosen by international, well-paying tenants. "Non-compliant" properties face higher loan and insurance costs, and international tenants' own rules restrict them, putting them at a competitive disadvantage. The ESG requirement exerts a market-limiting effect, raising investment costs but ensuring high-cost level returns, steering the market towards large investment funds.
Handling ESG regulations effectively is only possible through the cooperation of real estate development, asset management, and operations. Managing energy, portfolio digitalization, city operations, security, and transport problems is inconceivable without colleagues equipped with technical-financial and legal expertise and experience. Under these conditions, Asset Management, Property Management, and Facility Management services can only be provided effectively if done in a fully integrated manner.
Therefore, in the future, regionally or preferably locally integrated service providers like REM Group will be needed.
The above has been translated from Hungarian to English with the use of AI.