ESG is as important in PRS as in other real estate sectors

There are enormous changes and challenges ahead for the real estate market, including the residential sector.

With the European Union’s Green Deal policy, including the Fit for 55 programme and associated large-scale legislative actions, the issue of sustainability (environmental, social and governance – ESG) has become particularly important to the real estate industry.

ESG is not a temporary tendency based on unspecified standards, but an irreversible trend towards developing a sustainable economy that respects the principles of environmental, social and corporate governance.

From existing regulations such as the Non-Financial Reporting Directive, Taxonomy and the Sustainable Finance Disclosure Regulations, and by advancing legislation to expand the group of entities required to prepare non-financial sustainability reports, as envisaged by the Corporate Sustainability Reporting Directive, to sustainable construction solutions being developed as part of the New European Bauhaus project, all of these legislative measures represent a real challenge for the entire real estate industry in CEE, including the residential sector.

Existing ESG regulations related to taxonomy and non-financial reporting, as well as the associated increasing pressure from financial markets to make investments with ESG principles in mind, have resulted in not only institutional investors but also local developers in CEE markets starting to attach increasing importance to sustainability principles.

They are beginning to recognise the challenges of Green Deal policies and the need to adapt their businesses to the changing regulatory environment, as well as the increasing pressure from institutional investors to invest in sustainable products. This is reflected in the development of sustainability strategies and the publication of the first non-financial reports by major developers in CEE.

This applies not only to office and logistics developers, but also to residential developers. ESG strategies include specific carbon footprint reductions in the production of new facilities, measuring performance according to international standards, implementing the principles of the “closed loop” economy, and analysing opportunities to optimise investments in terms of emissions and resource consumption.

Another sign of the real estate industry’s growing interest in ESG issues is the increasingly widespread certification of real estate facilities. The housing sector did not for a long time seem to require the certification of facilities. This was understandable given that individual consumers in the housing sector are generally guided by different criteria when deciding to purchase a dwelling compared to institutional investors.

The private rented sector

This started to change with the development of the private rented sector (PRS) market: institutional investors investing in ESG facilities are paying greater attention to whether and to what extent the facilities meet ESG requirements.

One response to market expectations is the creation of certificates for residential buildings, such as the PLGBC Green House certificate, which is used in Poland and has been adapted to local legal requirements.

Another response is to provide guidance to developers on how to design residential buildings to be sustainable and economical. Given that the real estate sector is responsible for 40 per cent of CO2 emissions, of which 68 per cent are attributable to housing, we can expect that this trend will accelerate considerably.

In addition to environmental (E) issues, we can also expect that corporate social responsibility (S) and corporate governance (G) issues will have a significant impact on development in the residential sector.

The 15-minute city

Regarding corporate social responsibility (S), increasing importance is being attached to the design of housing developments with the specific needs of different age groups in mind.

For example, this is reflected in projects that consider the needs of families with young children, seniors who need increased comfort and security, and independent living for people with disabilities. Leading developers further assume in their strategies that certain parts of their developments will be completed by 2030 and will meet the criteria of the 15-minute city.

These are often multi-functional projects sited within walking distance of key infrastructure such as public transport, green spaces, education, sports facilities and shops. Developers’ strategies also do not overlook corporate governance (G) issues, which provide for the implementation of a policy to equalise gender ratios in company bodies and to ensure equal opportunities for employee development.

In addition to companies adapting their strategies to the requirements of ESG assumptions, legal changes can also be expected. It is therefore clear that there are enormous changes and challenges ahead for the real estate market, including the residential sector.

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