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As part of the increasing demand for sustainable building operations, commercial property owners now have to make ‘green’ allowances in their capital expenditure planning. The ability to attract government and blue chip tenants going forward depends on it. |
A significant factor in this new environmental landscape is the recent Australian, state and territory government approval of a mandatory disclosure scheme for building operations energy efficiency.
The National Framework for Energy Efficiency has made the observation that commercial buildings account for at least 10% of Australia’s greenhouse gas emissions, and those emissions have grown by 87% from 1990 to 2006 (excluding emissions associated with building and construction). This increase in emissions is predominately caused by poor energy efficiency, poor energy management and outdated technology.
The two graphs below show the significant contribution of commercial property and in particular office buildings to energy consumption and green house gas emissions.
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Figure 1.1: Growth of energy end use in the commercial and residential sectors, 1973-2005. From CIE 2007 (original data source, Australian Bureau of Agricultural and Resource Economics)
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Figure 1.2: Australian Commercial Sector – CO2 Emissions by Building Type. Source: Australian Greenhouse Office (1999).
The scheme will add a whole new level of transparency in the commercial building market and will enable tenants and purchasers to see at a glance the energy ratings of buildings, in the same way consumers currently assess the star energy efficiency ratings on household appliances.
The scheme will foster competition between landlords competing for tenants and provide a point of difference for those with high ratings. The 2009 CoreNet Global and Jones Lang LaSalle sustainability survey found that 89% of corporate real estate executives consider sustainability criteria in making leasing decisions. It is expected that those properties with a low NABERS Energy rating and that have high forecasted capital expenditure for efficiency improvement works will provide a purchaser or lessee with a negotiation lever which may lower returns and possibly capital value for the commercial property owner.
Mandatory disclosure for commercial buildings is planned to be implemented in two phases;
• Phase one involves implementing a national mandatory disclosure scheme for commercial office buildings.
• Phase two involves consideration of expanding mandatory disclosure to other commercial building types, including hotels, retail buildings, schools and hospitals, subject to regulatory impact assessment.
The disclosure obligations that are scheduled to have effect from 1 July 2010, initially affect all office buildings (Class 5 under the BCA, which includes office buildings in industrial zoned land) with a net lettable area (NLA) over 2,000sqm.
The disclosure obligations mandate that the following must be disclosed in any advertisements about the sale, lease or sub- lease of part of, or a whole property in excess of 2,000m2:
1. A NABERS energy base building star rating in any advertisement about the sale or lease;
2. A valid Building Energy Efficiency Certificate (‘BEEC’) to prospective purchasers or tenants; and
3. A valid BEEC to a central registry within 30 days after a proposed sale or lease is initially advertised.
A BEECs must contain required information about the property, including; the base building rating, lighting details for tenancies, and building and tenancy energy efficiency guidance. The scheme will apply to the sale or lease of existing buildings which have been occupied for more than 12 months and therefore have 12 months of energy use data for determining the applicable NABERS energy rating. A small number of transactions may be exempt from the scheme, including short-term leases of less than 12 months duration and where energy efficiency cannot be assigned to the part of the building been transacted (e.g. some strata schemes).
The scheme will include prescribed penalties for failure to disclose information. This may include civil action, fines leading up to $100,000 and the ability for prospective tenants of purchasers to with hold funds depending on the disclosure.
With recent market data indicating the average NABERS rating is between 2.5 and 3 stars, building owners will need to review what options are available for energy efficiency improvements in their CAPEX planning.
This is particularly pertinent to owners looking to lease to state and federal government tenants who have policies indicating preference for tenancies with a minimum 4 to 4.5 star NABERS Energy rating.
As corporate policies on environmental standards become more developed, the mandatory disclosure scheme will provide companies with the ability to set their own minimum standard. This will likely have an effect on attracting new tenants and retaining existing ones, especially in areas with higher vacancy rates.
A more efficient building will carry lower running costs thus reducing service charges and sinking fund contributions. An efficient property is also now seen by some investors as more appealing as it may provide a lower long term risk of vacancy.
While older stock on the market is generally achieving lower ratings than new properties, this is not to say they cannot achieve improved results. As demand for efficiency solutions increase so too does the supply of innovative technology. Trigeneration, solar harvesting, lighting upgrades, lighting controls, building management system improvements and HVAC advancements are just a few of the areas open to property owners to enhance efficiency.
A recent example of successful existing building upgrade is, NSW Local Government Super, who is completing building upgrades to 4 commercial buildings with two more commencing currently. The upgrades will move the buildings to achieve 4.5 to 5 stars NABERS Energy (from previous 3 to 4 star ratings). Napier Blakeley were the consultants in relation to the upgrade works and successfully obtained $2.1 million dollars in government grants through the Green Building Fund to support these works. The work being undertaken includes upgrade of lighting to leading efficient E1 lighting, solar panel installation, implementation of the air conditioning upgrades and other efficiency work. The cost of works ranges from $50 to $150 per square metre and approximately half that rate when taking the funding into consideration.
This example demonstrates the growing move towards proactive building upgrades, providing environmental performance future proofing. With the new legislation likely to increase the need for property owners to address tenancy expectations surrounding efficiency and some owners addressing this concern, this new competitive edge needs to be considered in asset plans.
The Green Building Fund has a final round closing for applications in April so owners wanting to take advantage of this need to act quickly to meet application requirements.
While mandatory disclosure is not yet compulsory, now is the time for property owners to review their assets. NABERS ratings look at the previous 12 months performance so any upgrade will not be fully reflected in the rating until the works have been in place for a full 12 months. The time needed to prepare the NABERS rating should also not be underestimated. You do not want to be in a position where you are ready to advertise an area over 2000sqm for lease or sale and do not have a NABERS rating which will be legally required for the advertisement. Collating the specific data to meet NABERS validation protocols, engaging an accredited assessor and completing the assessment may take some time. If your data required for the rating does not meet requirements for the assessment, this may negatively impact your rating; so ensure you are prepared well before you are looking to advertise space for lease or sell your property.
Information in this article has been obtained from various sources including Davis Langdon, Napier Blakeley, Crisp Legal, Colliers International and The Commonwealth Department of the Environment, Water, Heritage and the Arts (DEWHA).
| If you are looking to buy a commercial investment property and are thinking of using a buyers agent to gain more advantages with your purchase, call Prosper Group buyers agents now on 1300 664 373 or email us on enquiries@prospergroup.com.au |
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