Investors and financiers in Hungary need to take another factor into account: under the legislative amendment adopted at the end of September, breaches of environmental or nature conservation requirements may lead to the suspension of building permit procedures and, for certain priority investment projects, a ban on issuing permits for at least six months. The change is relevant to property developers, industrial investors and financing institutions alike, as the consequences of an environmental breach may affect project schedules, costs and access to financing.

Environmental compliance has always been part of preparing and implementing investment projects, but the legislation adopted at the end of September may significantly increase the business risks associated with breaches. The amendment aims to ensure that violations of environmental and nature conservation requirements also have substantive consequences in the permitting of priority investment projects.

Under the new provisions, if an administrative procedure is initiated in connection with a priority investment project because of a breach of environmental or nature conservation requirements, the authority concerned must notify the building authority, which suspends the permitting procedure until the decision in the environmental case becomes final.

The legislation also allows the legal provisions governing the particular priority investment project to prohibit the issuing of new building or establishment permits until the non-compliant situation has been remedied, but for at least six months. This sanction may be applied under a separate provision, so its precise consequences must always be assessed in the context of the legal and administrative framework applicable to the project concerned.

What does this mean for investors?

For a major property development or industrial investment project, even a delay of a few months can have serious financial consequences. Construction contracts, subcontractor capacity, material procurement and financing agreements are typically based on a predetermined schedule. If a project’s permitting process unexpectedly stalls, this may affect the entire investment plan.

A delay may increase financing and construction costs, change the planned handover date and, in some cases, adversely affect the return on investment. Developments whose implementation is tied to tight deadlines, pre-agreed lease contracts or specific financing conditions may be particularly sensitive.

The new rules therefore further increase the importance of project preparation. Identifying environmental and nature conservation risks in good time, properly preparing the necessary permits and documentation, and continuously monitoring compliance during construction can help prevent subsequent disruptions.

Financiers should also reassess the risks

The change is also relevant to banks and other financiers. When financing an investment project, environmental and regulatory risks are becoming increasingly important alongside the project’s expected cash flow, implementation schedule and collateral value.

A prolonged permitting procedure may delay the start of the project’s revenue-generating phase, while financing costs may continue to accrue. This may affect the project’s financial indicators and compliance with the conditions stipulated in the loan agreement, and may also require changes to the financing schedule.

Assessing environmental compliance may therefore become a more prominent part of financiers’ due diligence processes. Evaluating the project’s environmental risks, the status of its permits and the fulfilment of related commitments can help provide a more accurate picture of its long-term viability.

All of this is consistent with the broader market trend of financial institutions and investors paying increasing attention to properties’ environmental performance, energy efficiency and climate risks.

Sustainability considerations can pay off as early as the design stage

The stricter legislation also draws attention to the value of taking sustainability considerations into account throughout the investment project’s entire life cycle. Beyond regulatory compliance, properly managing environmental risks may also offer benefits in terms of operating costs, the property’s ability to retain its value and financing opportunities.

Internationally recognised building certification systems can help with this, including BREEAM (Building Research Establishment Environmental Assessment Method), which assesses the sustainability performance of properties against a consistent set of criteria. The assessment may cover energy and water use, material use, waste management, the health and comfort of building users, and ecological considerations, among other areas. The BREEAM assessment framework can help identify areas for improvement and provide an objective basis for demonstrating a property’s sustainability performance to investors, tenants and financiers.

It is important, however, that a sustainability certification does not replace environmental permits or regulatory assessments required by law. As a complementary tool, it can nevertheless contribute to more deliberate management of environmental performance and a better understanding of the associated business risks.

How can Grant Thornton help?

Grant Thornton’s property sustainability assessment services support property owners, developers and investors in gaining a comprehensive picture of their properties’ environmental and ESG performance.

These services include property ESG maturity assessments, sustainability due diligence and professional support for BREEAM In-Use assessments. The latter primarily serves to assess and improve the sustainability performance of buildings already in operation.

The assessments can help identify environmental and operational risks, determine potential areas for improvement and provide a basis for longer-term investment decisions concerning properties.

The legislative change in September once again demonstrates how closely environmental compliance is linked to the financial and business planning of investment projects. Companies that pay attention to environmental risks as early as the project preparation stage can create more predictable operating and financing conditions for themselves.

Find out more about Grant Thornton’s solutions based on its property sustainability assessment and BREEAM In-Use services.