Forget the feel good factors in energy efficiency or climate change. At the end of the day, according to green enthusiast Harry Chua, it’s the beautiful set of numbers on the bottom line that make the recent deal to upgrade his office building in the Melbourne CBD speak volumes.

Chua is the Melbourne investor who this week revealed he has signed up with the National Australia Bank for Australia’s first privately funded environmental upgrade agreement for his building at 123 Queen Street in the Melbourne CBD.

Another EUA deal, for the Kings Technology Park in Dorcas Street South Melbourne funded by Sustainable Melbourne Fund for the Melbourne 1200 buildings program was announced on the same day.

On Tuesday, Chua spoke to The Fifth Estate to explain what compelled him to become a pioneer in a lending facility that was still untested, but has captured the imagination of major investors in Australia and the US, former US president Bill Clinton and Virgin chief Richard Branson.

In Chua’s view, yes, the deal is good for the environment; it’s good for marketing, for staff morale, for tenants and for clients of all descriptions who want to know how the building owner is managing the asset.

But above all it’s good for the bottom line, says Chua. And this is the point he wants to make clear.

The building, at 123 Queen Street, will be upgraded with a trigeneration gas fired energy system, light sensors and double glazing .

Here’s how the numbers go:

• Total energy bill before the upgrade, $350,000 a year
• Energy savings with the upgrade, $180,000
• Return on investment, 11.79 per cent
• Payback, 8.5 years
• Total cost of funding of the EUA, 7.7 per cent
• EUA loan from NAB, 1.34 million
• Total cost of upgrade including loan plus additional “preparation costs,” $1.54 million

Chua, a medical practitioner who now concentrates on his property and hospitality portfolio and prefers to keep a low profile, defied his reticence to speak to The Fifth Estate, in the interests of sending out a message about these numbers.

“Sustainability is something I have a passion for,” says Chua, who is a director on the board of advisers for Climate Alliance. However, such concerns are irrelevant to many property investors, he says.

“Some people might want to do this sort of work because they have a passion for doing the right thing environmentally, but if it doesn’t make commercial sense, most people won’t do it,” Chua says.

“There are a lot of people who don’t believe in the cause, in climate change. But at the end of the day that doesn’t matter if this makes sense financially.

“So we want to make sure this works financially. That’s the message we want to get out.

“With the $180,000 per annum in savings, that’s a return on investment of 11.79 per cent. That’s pretty much an 8.5 year payback.

“If electricity goes up 30 per cent it will dramatically increase,” Chua says.

“On top of that we have a Green Building Fund loan which makes it a 17.3 per cent return on investment.

“But even without the Green Building Fund grant the cost of borrowing from the EUA is 7.7 per cent all up and the return is 11.7 per cent. So it’s positive and the cost of electricity will become more expensive, so these figures are a worse case scenario.”

The upgrade work is over a 1960s building with an unusually complex blend of uses over 16,240 square metres of lettable area.

There is a 72 room four-star hotel, multiple bars and nightclubs, function room with licence for 2000 people and conference facilities, plus retail and office space including for Chua’s own staff to run his property portfolio.

Chua describes the building as “pretty much inefficient”, with a NABERS energy rating of about one star.

“Our carbon foot print is 4800 tonnes per annum and the savings will be 1300 tonnes…per annum. That’s a 27 per cent reduction in carbon footprint print.

“We do use a lot of energy and to be clean [green] would be fantastic. Also as a marketing exercise,” Chua says.

“When people inquiry about functions and training rooms they want to know, what is your stand on sustainability? And we can say, we are doing this and in 12 months time we will be carbon neutral.

“It’s a good story for our kids and our future and it makes sense marketing wise.

“To bring it up to four star [NABERS energy] will make tenants will feel better.”

Chua wants to make the building to be 100 per cent carbon neutral by the end of 2012, with the balance of carbon savings purchased through carbon credits.

Work has commenced an the trigeneration system ordered and expected to be operational by the fourth quarter of 2012.

Twist in the tale
An interesting twist is Chua’s decision to pick up the tab for the loan himself, but this is a decision with a kicker in it.

Most of the tenants are on gross leases, and some on net. So those on gross leases do not pay additional charges for outgoings; these are incorporated into the overall rent. While those on net leases pay for outgoings separately.

In the Melbourne version of the EUA agreements each tenant in the building needs to agree to the scheme, with the proviso that they be no worse off.

But with multiple tenants on a mix of gross and net leases, Chua decided it would be easier to pick up the tab himself.

“We’ve done all the financials. We are not passing on costs on to the tenants; it gets complicated and is very hard to understand how the savings will work out.

“The way I saw it, I will pick up the cost and the savings will amount $180,000 per annum in energy. The gas bill will cost more but we will save on electricity.

The sweet spot will come when it’s time to renegotiate the rent. With the tenants enjoying lower cost of outgoings it ought to place an interesting premium on the value of remaining in the building.

Plans

Next plan is to roll out the program to other buildings in his portfolio, Chua says.

“We have small city buildings. This is the first one to start with then we will roll this out to a few other properties.”

The Fifth Estate – sustainable property news and forum

Australia has most mature retrofit market

World Economic Forum report

15 November 2011 – A World Economic Forum report on the retrofit market says Australia has the most mature market to date, but that’s out off a very low base. The report points to the massive energy savings potential in inefficient buildings and makes a strong call to action on policy makers, which it says have the power to catalyse change.

In a presentation to a joint Australian Property Institute and Property Funds Association conference in Sydney on Monday lead author Robin Ried, outlined key findings of the report.

A Profitable and Resource Efficient Future: Catalysing Retrofit Finance and Investing in Commercial Real Estate was based on recommendations from six country case studies, China, Japan, US, UK, Germany and Australia.

It quotes McKinsey & Company’s estimate that energy efficiency measures including retrofits would spur the creation of 600,000-900,000 long-term green jobs and $400 billion in investment the United States alone.

Yet “retrofitting remains an anomaly,” the report said.

“In the United Kingdom, for example, the rate of retrofitting existing buildings is less than 1 per cent of the building stock Failure of the market to take off can be attributed to weak demand caused by several structural and market barriers that discourage a range of potentially willing stakeholders – building owners, financial institutions, institutional investors and utilities – from borrowing or lending the capital to finance projects at scale.”

According to the report, “policy-makers hold the power as the single greatest catalyst to spark demand, enable a market and provide structure for all stakeholders to participate.”

Critical roles in unlocking potential are also held by banks, insurance companies, institutional investors, utilities, energy service companies and real estate holders.

Would be investors would also benefit from government-mandated, standardised energy consumption reporting and efficiency rating systems for buildings, combined with additional policies such as tax incentives, loan guarantees or credit enhancements.

In Australia, the more advanced nature of the market was attributed to a long-standing reporting and rating system, as well as additional government-led action, including tax deductions and a third party institution to take on demonstration projects.

“Government and business share an interest in improving energy efficiency in commercial buildings,” said Colin Dyer, President and Chief Executive Officer, Jones Lang LaSalle. “Policies enabling and encouraging cost-effective building retrofits could reduce carbon emissions while driving economic growth through job creation, cost reduction and risk mitigation.”

Berkeley and Maastricht universities’ academic Nils Kok arrived in Australia last week to confirm what every sane investor knew all along, that sustainable and energy efficient buildings are better buildings and worth more than their run of the mill energy guzzling peers.

The academic from Berkeley and Maastricht universities is the man who has embarked on the huge mission of collating data from around 20,000 buildings in the US on the issue of green investment value.

He is also close to finalising a similar job for Australia in collaboration with the University of Western Sydney, Jones Lang LaSalle and CB Richard Ellis, for an anticipated September launch.

Kok spoke at Australian Property Institute/Property Funds Association events in Sydney and in Melbourne hosted by NAB, and also in Sydney at a session by the Green Building Council hosted by Stockland.

His key message was that in today’s market it wasn’t so much the premium that green rated buildings achieved as the discount that applied to non rated buildings, which his studies to date have shown is, -3 per cent in rents, -7 per cent in effective rents and -13 per cent in transaction value.

An interesting point is that at very high levels of sustainability the rental premiums disappear, Kok said.

This might have something to do with the extra cost of the technology; features likely to earn innovation credits under the US Leadership in Energy and Environmental Design sustainability rating system, such as green roofs, for instance, may provide other benefits, but not extra income.

“As values go higher the rental premium even flattens off when you go from Leadership in Energy and Environmental Design, Gold to LEED Platinum…if you put tri-generation into your building it’s not necessarily value enhancing,” he said.

Typical of the curious researcher and interestingly, given the scope of change under way in the Australian property market, Kok is already moving on.

The really bright new idea, he said, is what’s happening at the B and C grade level of buildings. It’s here that the real number crunching will kick in, to work out what happens when you take a building from a 2 star NABERS Energy rating or less to 4 stars or higher.

Out in the marketplace the savvy investors, led by even savvier consultants, are priming for a boom in this kind of work, market sources say.

The drivers are mandatory disclosure, the carbon price and the new performance indicators showing that a green building revolution makes sense.

Investors such as GE Capital, Kok pointed out, might have some highly rated buildings but the average rating for its portfolio might be 2 or 3 stars.

“It does not have a premium rated average and that’s where we should focus the debate,” Kok said.

A big part of the market doesn’t even know what NABERS is, Kok said.

On the carbon tax, Kok said: “I think the impact will be small but again, it’s the difference between efficient and non-efficient property.”

Kok pointed to work led by Colonial First State’s Rowan Griffin showing that the carbon price would be a driver, albeit minor.

At an estimate $25 a tonne (the work was done before the carbon price was announced) it would add $2 a square metre to the rental cost of a five star Green Star building and $4 a sq m to a four star Green Star office.

Not a big deal in the end, and likely to be passed on to the tenant, leases or lease adjustments permitting.

Joining Kok in vigorous discussion at three key events were, in Melbourne, panel members NAB’s Sean Lucy, head of origination environmental finance solutions, Sustainability Victoria’s Stfan Preuss and IPD’s Australia &New Zealand managing director Anthony De Francesco.

In Sydney panel members at the API/PFA event included Walker EcoStrategies’ Roger Walker, Brookfield Multiplex’s Lauren Haas, IPD’s Dr De Francesco and NSW’s Department of Environment & Heritage’s Matthew Clark.

At the GBCA session panel members included Nathan Fabian,

Investor Group on Climate Change, Elaine Prior, Citi Investment Research, Rowan Griffin, Colonial First State Global Asset Management, Adam Murchie, vice president Property Funds Association. Moderator was Stockland’s Siobhan Toohill.

Commenting from one of the Sydney panel sessions Colonial First State’s Rowan Griffin said he agreed there was no longer a premium for green property. “We have already gone to the stage where it’s the norm to be green and energy efficient, so people expect that out of premium buildings. So it’s more a discount of those that are not energy efficient and not green.

Brookfield Multiplex’s Lauren Hass revealed a preview of productivity research about to be released soon on One Shelley Street the latest new office building for Macquarie Bank.

Overall, said Haas, energy efficiency is about 4 per cent of total costs and people represent about 80 per cent.

Better indoor air quality can return much more to the occupant than the savings on energy she said.

“If productivity rises 15 per cent, and 3000 people are telling us that, that’s pretty important,” she said.

And what about staff attraction? The market has a hard time valuing that kind of metric Haas pointed out.

Stockland’s Siobhan Toohill said a big message for her from the session was the “enormous amount of data” being put together by analysts very interested in the performance of the property sector. Another was that “Australia is at the forefront of the pack.”

In other parts of the world said Toohill the move to greener buildings was more fragmented. There was much more collaboration in Australia, she said. The real estate investment trusts work together and through the GBCA and the Proeprty Council of Australia.

“This enables us to have those conversations and lift performance as a group,” Toohill said. “While there is some level of friendly competition there is also a recognition of us being really collaborative.”

3 August, 2011

“WE HAVE TWO SETS of needs as humans…sociability and sustenance,” says Carolyn Steel, author of Hungry City and lecturer at Cambridge University. “They are in conflict, because the more we cluster together in villages, towns and eventually cities, the further we get from our sources of sustenance.”

According to the United Nations Population Fund, more than 50 per cent of humanity now lives in cities and that figure is rising. But while cities are good at generating jobs and providing us with social stimulation, they’re less effective at providing food or recycling their energy, water and nutrients.

“The people who plan cities are ignorant when it comes what human beings need for survival…Cities are quite good at providing water; they are hopeless at providing food,” says author of The Coming Famine, Julian Cribb.

Rapid urbanisation means the situation needs to change, and fast. “By 2030 there’ll be many cities with 30 million people. If those cities produce none of their own food, they’re totally dependent on a river of trucks. If that river fails [due to an oil crisis, a local war, or a disaster like the Queensland floods] those cities would be starving within three days,” Cribb says.

“If we can get the world’s cities back to producing 20, 30 or even 40 per cent of their own food, and only relying on the landscape for the balance, we’ll have a more sustainable agriculture and more sustainable cities,” Cribb says.

To get there, Cribb believes we need to put in place an array of urban food producing industries and activities. But while governments lag behind, resident of the inner Sydney suburb of Chippendale, Michael Mobbs needs no convincing. After taking his inner city terrace off the grid in the late 1990s, Mobbs soon realised his house was sustainable but his belly wasn’t.

Urban food

Join

Food co-ops typically buzz with members who know local and seasonal food inside out.

Grow

Australian City Farms and Community Gardens Network – join or start a community garden in your area. For inspiration, check out two of Australia’s best: Northey Street City Farm, Brisbane and CERES Community Environment Park, Melbourne. While you’re there, keep an eye out for Stephen Muslin’s Micro Farmers Food Hub project, run in partnership with CERES and a recent winner of the British Council’s Big Green Idea award.

Eat

In Sydney or Brisbane? Try Food Connect vegie boxes to support sustainable urban food model.

Learn

Most councils run free courses in urban gardening or composting.

“My house saves 100,000 litres of water a year, but eating the typical Australian diet means there’s over 100,000 litres of water in my food every 10 days. I realised I needed to grow or buy my food locally. Living in a small terrace I was compelled to go onto the street,” he says.

Mobbs soon found others wanted in. “Neighbours were attracted to it and inspired; it wasn’t my plan.”

It is now. Chippendale residents have planted out six city blocks with food; provided the suburb’s 4,000 residents with community composting; and planted over 200 fruit trees, herbs and plants across the 32 hectare suburb. It’s just the start, especially now that Mobbs’ local council, City of Sydney, has recognised the value of planting the streets with food. “The General Manager came out and walked the streets and saw it as a no-brainer,” he says.

As a result, the two groups are now working together to turn Chippendale into a sustainable suburb where growing food is a key part of the picture. “We’ll paint the roads to cool the suburb by two to three degrees; put in pop up median strips that are self irrigating and shade the street; and we’d also like the first urban commercial urban farm,” Mobbs says. Space is at a premium in Chippendale, so the urban farm which could grow 33,000 kilograms of vegetables and 10,000 kilograms of fish will be “on top of a roof”.

Mobbs believes the 10 year plan could see the suburb growing 40 to 50 per cent of its own food, a huge boost on the 10 per cent they’d be lucky to get at present.

“In [less dense] suburbs, you can [easily] grow 50 per cent now – that’s what used to happen,” he says.

Mobbs considers securing even part of his food supply locally to be a smart move. “Why would you bet everything on the chain stores? Have an each way bet; put some money on yourself and your community and some on the usual methods,” he says.

Of course, Mobbs isn’t the only Australian taking action. The humble backyard vegie patch is experiencing a renaissance. Once an unremarkable part of every Australian backyard, the vegetable patch experienced a boost in the 40s, when ‘victory gardens’ were promoted to make up the shortfall as farmers turned into soldiers. But since then, perhaps because of the abundance of fresh food, the vegie patch gradually waned in popularity.

But now, says Peter Kearney from Cityfood Growers, vegies are back. His company, which provides local food growing tips, has 2,000 subscribers. Demand for plots in urban community gardens is booming, with hundreds of gardens (both formal and informal) blossoming nationwide; and Australia basks in occasional kudos from global experts thanks our status as the birthplace of permaculture.

And it’s not just Australia. Mayors of cities like Barcelona, Rome, New York and London have written strategies recognising the importance of urban food systems. In Holland, South Korea, and Japan the idea of vertical farms – hi-tech, food-growing high rises – are taking off. And projects like Stephanie Alexander’s Kitchen Garden Program and Rome’s School Food Program (where 140,000 local, seasonal meals are provided every day) show it’s possible to creatively tackle the issue with adults and kids alike.

Both Cribb and Mobbs believe it’ll be hard to achieve substantive change in urban food systems without people feeling the ramifications of inaction on a personal level. “It’s hard for anyone in Australia to take what I’m saying seriously, because none of us have ever been hungry,” Mobbs says.

“My view is that the food riots we had in 17 countries in 2008 were a precursor to a complete global food shortage, which I think will happen before 2020,” Mobbs says. “I’m gardening as if my life depends on it, because I think it does,” he says.

Ausgrid has reported ongoing declines in NSW electricity consumption.

A blip or a trend?

What is driving this recent trend? And is it likely to continue, or is it just a short term blip?

No-one really knows. Unlike most industries, the electricity industry knows surprisingly little about what drives demand for its product.

The fragmentation of the industry through energy reform, and the intense competition, means information is mostly confidential and held by different organisations.

Demand is also driven by factors that are diverse and poorly documented: we don’t know the average efficiency of new TVs sold, or the levels of energy-related activity in specific industries.

And the industry has built its culture on a long history of growing demand. So there has been confidence that growth will always return to generate revenue.

Importantly, we are beginning to see the early effects of a diverse range of government policies and programs, as well as outcomes of technological and structural change.

To my knowledge, no-one has a model that can provide comprehensive bottom-up economy-wide forecasts of future demand in this time of rapid change. Past use of top-down economic indicators based on historical trends can no longer be relied upon.

What could be pushing power use down?

Efficient commercial buildings: The commercial building sector has adopted rating schemes such as NABERS and Green Star, as well as the 2006 and (much more stringent) 2010 building energy regulations. These have driven rapid technological change, which is flowing into existing buildings.

Consumer demand for more efficient buildings has grown, with some governments requiring high performance buildings for new leases. A five star NABERS building uses less than half as much energy as a 2.5 star one – based on real energy consumption data.

Also, the easiest way to improve a NABERS rating is to switch everything off outside working hours – not great for base load power demand.
Online shopping: The retail sector consumes around 40% of commercial sector electricity. The growth of online shopping may, over time, reduce demand for retail floor area and apply stronger pressure to cut operating costs such as energy use.

Efficient homes: Residential building energy regulation has also become more stringent. From May this year, it includes limits on lighting energy efficiency and effectively bans off-peak electric hot water services in new homes (there goes more base load).

Household appliances are also improving in efficiency. Total energy consumption of products carrying energy labels (excluding air conditioners) seems to have peaked around 2005 and is now declining.

Over the past two years, flat screen TVs have radically improved, with the best 8-star models using much less power than smaller traditional cathode ray TVs. The best new air conditioners use two-thirds less power than many older models. And lighting energy use is being transformed by compact fluorescent and LED lighting.

Reduced hot water use: From 2012, if your off-peak electric hot water system fails,you will have to replace it with a low emission alternative. And the spread of water-efficient shower heads and appliances is reducing hot water consumption.
Smaller houses with more people: New home size seems to have finally peaked. As it declines, new homes will use less energy for lighting and comfort.
Population growth has slowed, and average household size has begun to rise for the first time in many decades.

Making your own energy: Over the past 18 months, Australians have installed around 650 megawatts of solar cells on their roofs – a large proportion of recent peak demand growth.

These effectively reduce the visible electricity consumption by replacing grid electricity on-site and in the local network. They work well to offset the commercial sector peak day demand profile, and undermine demand at the most profitable times for the electricity industry – hot sunny days.
Industries and commercial buildings are showing increasing interest in installing on-site low emission electricity generation, such as cogeneration and trigeneration. Like solar cells, this will reduce the amount of electricity drawn from the grid.

Better street lights: Increasing numbers of local councils are replacing inefficient street lights with much more efficient ones, reducing off peak power demand.
Higher prices: Recent electricity price increases have focused many households and businesses on saving electricity through more careful management of equipment and insulating themselves against expected ongoing price increases.

The high Australian dollar has put pressure on manufacturing and services sectors. Activity in some areas has declined, and there may be a long term trend towards relocation overseas – due to forces much more powerful than a carbon price. At the same time, industry is feeling increasing pressure to cut energy use to save money and avoid carbon costs.

The GFC: Then there is the impact of the global financial crisis – this is the only factor described here that could be called a potentially transient effect. But it may also be the “straw that breaks the camel’s back” for some industries, driving them offshore or out of business and reducing Australia’s electricity consumption.

How will power companies cope?

Importantly, many of these trends can grow rapidly. Installed Australian solar PV capacity tripled in 2010. Halogen lamps last only 2,000 hours or so, so LED lamps could replace almost all energy guzzling halogens over a few years as their lighting performance improves and costs come down. This could save 80% or more of the electricity now being used by halogens.

Better metering and monitoring is improving our ability to identify faulty equipment, or see if equipment has been accidentally left on.

At the same time, the traditional electricity industry will face increasing uncertainty and risk of building assets that may no longer be needed in a few years. Costly decisions could be made, as large power stations and powerlines take years to plan and build, and a long time to recover their costs.

If they try to pass these costs onto customers, they will simply accelerate investment in energy efficiency, renewable energy and smart energy management. And if they fail to deliver reliable supply, they will face criticism and pressure from government, business and the public. They will lose more demand to alternatives that allow business and households to insulate themselves from lack of reliability.

We live in interesting times.

Alan Pears is a senior lecturer in Global Studies, Social Science & Planning at RMIT University. This article was originally published on The Conversation –

eIQ has purchased the equivalent carbon credits which have been surrendered. These credits comply with the Australian National Carbon Offsets standards.

Environmental IQ Carbon Audit Report V1.1

THE state’s small- and medium-sized businesses are reaping the benefits of government energy efficiency programs, saving a combined $70 million in power costs for about $8 million in government subsidies in the past two years, new data shows. So far, 345 dairies have participated in energy-efficiency programs in NSW and some have saved as much as 15 per cent on the cost of refrigerating milk.

In the past year, 247 butchers have saved up to 8 per cent, or roughly $1240 a year, on energy costs. And 2393 cafes and restaurants have improved their energy performance by up to 13 per cent, or $1362 a year. One winery, Tamburlaine in the Hunter Valley, was able to cut its energy use by three-quarters and save $110,000 a year.

The changes range from simple measures such as switching light bulbs to remote-controlled cooling and heating, or changing voltage and fan speeds. ”In terms of environmental benefits, it reduces costs for business, it reduces demand for electricity, it reduces carbon emissions,” said the NSW Environment Minister, Robyn Parker.

Country areas stand out for the highest number of businesses who are participating, with only North Sydney, Sydney and Marrickville making it into the top 10 regions. Most of the programs were initiated under the previous state government and some face funding pressure under the new government. The current government opposes the federal government’s carbon pricing plan, which includes a substantial energy-efficiency component, but Ms Parker said NSW would work with its federal counterpart where necessary.

”We can work with whoever can deliver good environmental outcomes – we have worked productively with the federal government in the solar flagships program – but I think programs like this deliver much better outcomes than a carbon tax. That is our position,” she said.

The government said it would publish mandated targets for energy-efficiency savings later this year. ”We’re working towards targets [for energy efficiency] and we hope that we will have those available as part of a broader state plan within a few months,” Ms Parker said.There are about 20,000 businesses in NSW classified as medium-sized energy users and the government says it will provide energy-efficiency subsidies to 5 per cent of them over the next five years.

The national industry body, the Energy Efficiency Council, said the NSW data was similar to that from other states, but much more could be done. ”NSW’s energy-efficiency programs are already helping businesses save over $56 million a year, but we haven’t even started to scratch the surface,” the council’s chief executive, Rob Murray-Leach, said. ”Energy efficiency could save the economy over $5 billion a year … These programs show that people who claim the carbon price will damage the economy are talking pure rubbish.”

8 July 2011 – Capital market players say sustainable property might soon become a better investment proposition. A carbon price will force up energy costs. In a carbon market, building owners and investors who know how to slash operating costs will have a competitive advantage.

Emlyn Keane, head of property management and sustainable performance at AMP Capital, says the prospect of higher electricity charges will put pressure on building owners to reduce operating costs. A greener building produces real energy savings which means lower costs. That makes the building more attractive to investors.

“It means that where we do an investment analysis of an upgrade project around sustainability and put a price on electricity and work out a pay-back period, if there is an extra tax on top of the energy cost, I can then do a far more attractive business case to put something into a building that will improve its sustainability credentials,” Keane says.

“These buildings are largely net leases and the tenants will be paying a lot of the carbon tax as it passes through the operating expenses. They will press upon the owners, what are you doing in this space to reduce my energy costs.

If you have landlords who are paying the costs directly, it will have an immediate strong driver for them to invest in sustainability upgrades of the building. And if you’re a fund manager and the property manager can reduce the operating costs, then that’s a higher driver to increase rents.

“If you go out into the market with low operating costs, it becomes an attractive element to leasing the space.”

AMP tenant survey finds high regards for environmental qualities

The biggest investment risk with property is an empty building with no tenants and no cash flow. Keane says a recent survey from AMP Capital of 700 tenants found that 86 per cent said they considered environmental credentials – meaning lower energy costs and a more productive working environment – were critical when deciding whether or not to take out a lease. For property investors, sustainability is about risk management.

Sustainability also allows building owners to increase rents, making them more attractive to investors. AMP recently upgraded the National Australia Bank building in George Street Sydney to a four and half stars NABERS rating. The rent went up and the return on investment was immediate.

A recent report by the IPD Property Index found that sustainable buildings delivered better returns. It showed that over the two years to March green, or NABERS and Green Star rated assets outperformed non rated assets.

Still, some say the jury is still out on whether sustainable property is a good investment and delivers superior returns. Certain investment managers say it’s still too early. The problem for property investors is that the returns might be long term. But that, Keane says, is the nature of sustainability.

Keane says: “In essence, the word sustainability is about sustaining for the long term.”

AMP Capital was so convinced that sustainability was a good investment proposition that it restructured its property division to align it with sustainability.

Sustainability working with property

Rather than having a separate sustainability group rolling out its own initiatives, it brought that into property so that everyone was working to the same agenda.

“We recognised early that it was going to be something that was part of property management and not an add-on that was here today and gone tomorrow,” Keane says.

“It’s intrinsic to everything we do, whether it be leasing, whether it be maintenance contracts, whether it be utility supply negotiations and tenants.”

But some fund managers are not completely convinced. Fund manager Adam Murchie from Forza Capital says many potential investors demand to see concrete evidence that sustainable property will deliver superior returns. It’s not something they demand from other assets.

“It’s unfortunate that in this era of liability that everybody wants to point to something as to why they have taken a course of action whether it be developing a sustainable building or investing in one,’’ Murchie says.

“You are asking someone to make a decision now that may not manifest itself in a portfolio for five or 10 years. So an institutional super fund will have league tables that are based on three, six and 12 month performance so the retail mums and dads deciding where to park their money are looking at three, six and 12 month numbers.

“But an institutional fund holds people’s money for 40 years or longer. How do you match that up when you are being measured on very short term but trying to make decisions for the long term?”

VicSuper, not convinced

Peter Lunt, head of investment research and governance at VicSuper, for example, is not convinced that sustainable buildings outperform. Nor does he see sustainable property becoming an asset class, despite more of it coming on to the market.

“I don’t believe it’s heading that way towards becoming an asset class,’’ Lunt says. “Fundamentally, you are investing in bricks and mortar and the behaviour of that asset should be no different to the broader risk-return parameters you would expect from property.

“My own view is that we would see no difference in net return back to us. From the people I have spoken to, it’s very hard to isolate the value that comes from whether you’re investing in green property or refurbishing it to green standards.

“Secondly, I think it’s too early to tell. We have been through one property cycle since the age of green building started and there is not enough of a track record to say there is any outperformance.

“Now, there is some evidence to suggest that you can retain your tenants a bit better and that tenants are a bit stickier which tends to suggest you get better valuation. However, when I ask our guys what the valuers are saying, they say nothing.”

Even if electricity prices become more expensive with a carbon price, it does not necessarily make the sustainable building more attractive, he says. It depends on whether the tenant is paying net or gross rent. Does the tenant see the bill or does the landlord? There are too many unknowns, he says, and it is too complex to make a general call.

“It may make sustainable buildings more attractive but it depends on how the carbon price will be implemented and the effect on the outgoings of the building,’’ Lunt says.

“In theoretical terms, your valuation should be good but if you have a rental agreement tied to inflation and your rent goes up to cover the higher input costs, you are back the same sort of yield.”

Valuers not sure about impact of a carbon price

He says no one knows how the carbon price will affect the sustainable property market. “I have asked valuers, and they don’t really know either,’’ he says.

Nonetheless, VicSuper is one of the many superannuation funds investing in sustainable property, as are institutional investors.

Some use consultants to advise them on property. VicSuper, for example, uses Frontier Asset Management,

Australian Super uses Frontier and Mercer. When they do their due diligence on a property, they will call in sustainability specialists and consultants to look at all aspects of the buildings.

They look at how many stars and the NABERS rating. AMP Capital looks at both carefully.

“When we look at property from a sustainability point of view we look at what its current performance is and that means NABERS. Any building that we are looking to purchase, if it’s on the market we will know what that NABERS rating is,’’ Keane says.

Adam Murchie

“What we will then do is look at what it will cost. We will know what it’s going to cost us to get it from what it’s currently performing at to what we believe reduces the vacancy risk.

“We tend to look at Green star more in the step change of the asset. It’s a holistic tool whereas with NABERS you can break it down into one rating for energy, one rating for water and one rating for waste. With Green Star, we see what the capabilities of the asset are.”

Murchie says more advisers are also looking at governance of the building managers, whether they have embraced sustainability, whether they are keeping staff, whether they have any affiliations like for example to the United Nations Principles for Responsible Investment or membership of groups like the Investor Group on Climate Change.

AMP Capital uses a corporate responsibility prism that assesses performance in four areas: workplace, community, environment and market place.

Never mind the building – what’s the manager worth?

Murchie says, “It’s much broader than investing in a sustainable building. You might have the greatest building in the world with a sustainable rating but it’s run by a manager no one would give five cents to, let alone five million dollars.”

They will approach real estate investment trusts with questions about the average rating of the profile of the buildings, be it NABERS or Green Star.

They will ask whether there have been changes over the past year and if any are expected over the next two. They will demand to know what their costs will be. And they will make inquiries as to how the organisation works with sustainability.

If they plan to upgrade a building, they will bring in technology specialists for airconditioning and lighting.

Investors are attracted to sustainable property for a number of reasons. The first is risk mitigation and future proofing buildings from changes in the regulatory environment, rising costs and demands from increasingly sophisticated tenants.

Another reason is compliance with new mandatory disclosure requirements. Under new rules introduced in November 2010, commercial buildings of over 2000 square metres have to disclose and advertise up-to-date energy efficiency ratings.

Brian Churchill

These ratings must be updated every year and be publicly accessible. They also have to be detailed in all advertising for the sale, lease or sublease of commercial properties.

Local Government Super

Brian Churchill, property portfolio manager at Local Government Super, says the mandatory reporting requirement is now a big driver for property investors to put their money into sustainable buildings.

“It’s now not a nice to have, it’s a must have,” Churchill says.

Churchill says an even more compelling reason for funds to invest in sustainable buildings is that it gives them access to a broader market.

“Government agencies won’t go into a building with less than four and a half stars and government tenants occupy about 25 per cent of the market. So if you build a three and a half star building, there is one quarter of the leasing market you have eliminated as possible tenants,’’ Churchill says. “Then, you have all the corporations like banks that are high on sustainability, so if you have the minimum, the field is getting smaller and smaller.

“You are trying to mitigate your risk and you want to have a product that’s available to as wide a field of occupants as you can possibly get.”

Churchill says the big investment opportunity for funds lies in upgrading buildings. He says that while the Property Council has estimated that the cost of upgrading a three star building to four and a half stars at $700 per square metre, Local Government Super has upgraded five buildings at $160 per square metre using superior technology.

More to the point, it upgraded them without shifting out tenants, thus maintaining cash flow. “We think that’s quite a competitive advantage,’’ Churchill says.

It’s not so hard to upgrade – widen your universe

“The exciting bit is you would normally brush aside an older building and say it’s very expensive to upgrade. But with new technologies, it’s not so hard, it’s a lot more feasible and a lot more inexpensive. Suddenly your universe is wide because you are able to take older assets and get them up to a performance standard that matches a new building.”

As an example he cites a 1991 building in Sussex Street, Sydney upgraded by his super fund. It is now ranked five NABERS stars and has the lowest energy intensity of any building in the city.

UBS – it’s more than investment returns

UBS senior property analyst John Freedman says much of the capital expenditure in the office market has little return. But the capital expenditure in upgrading a building goes beyond economics. Sustainability is like that.

He says developers and building owners are driven by what they believe tenants want. As a result, they are putting forward green initiatives to entice tenants.

John Freedman at a recent IPD green property investment index update

In the office market, tenants moving into new buildings almost regard it as a box to be ticked and expect a certain level of sustainability initiatives,’’ Freedman says.

He says institutions and super funds are “looking at it from a life cycle cost point of view in terms of energy costs and replacement costs and the impact on the environment.

“They are very conscious that over time there is likely to be a carbon market and that emissions will cost them. They want to minimise those costs but recognise there is an investment up front to do that.

“Building buyers are carefully watching that in regard to premium buildings. For secondary buildings, they are starting to think about the cost of retro-fitting and that will drive a larger gap between the performance of new buildings which meet certain levels versus older buildings which don’t and might have to be retrofitted,” Freedman says.

But he says the returns from the retrofitting need to be put in context.

Don’t expect capex returns

“Similar to a lot of other capex [capital expenditure] in the office market, you may not get any return on it. It’s a cost of staying in the game.

“If you don’t do it, your ability to attract the better quality tenants may be weaker, or you may face a smaller pool of tenants because some of them won’t move into your building unless a certain level has been reached.

“Having done this, you should attract higher paying tenants and you may get them more quickly. That helps drive better investment returns.

“In our view a lot of office capex generally has zero return. You do it to stay in the game and when you get the building revalued at the end of it, you get your costs back and that’s it.

“It’s rare in my view to do major capex to an office tower and find the value has gone up much if at all above your capex, unless you are in a boom market.

“Unfortunately at this point, green initiatives are probably similar but obviously they have an environmental sustainability and governance benefit that goes beyond the economic issue.”

While overseas superannuation funds like the Canada Pension Plan Investment Board have invested in the Australian property market by acquiring the ING Industrial Fund through a consortium led by the Goodman Group, Freedman does not expect the inflow of overseas capital will have an impact on the sustainability property market.

“Overseas investors by their nature tend to buy prime property at the premium end,’’ he says. “Premium end means premium location but it also means relatively new buildings and so therefore they are likely to be buying buildings that are greener anyway. It may have some influence but not necessarily great,” he says.

He does not see sustainable property becoming an asset class. Nor does he think it should. “I think that would be sad,’’ he says. “Isn’t it the point that sustainability becomes an integrated part of the industry’s approach to the way it operates?”

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According to Deb Noller of Switch Automation energy prices are starting to bite hard, even in the wealthy eastern suburbs of Sydney.
Recent private clients for the real time energy management technology have included homes where the quarterly power bill has come in at an astronomical $4000 or so.

“No matter what sort of income you are on, that sort of bill is going to bite,” Noller says.

For $1200 the company can install the technology in a home and pinpoint exactly where and how the energy is being used and display the results through a friendly an Ipad style interface.

Not surprisingly Noller and her co-founder John Darlington expect demand for the company’s services to jump next year and grow well beyond the corporate offices and businesses that want to improve their environmental and social profile.

Based in the inner city suburb of Chippendale, the company has already committed to two new sales staff taking total staff numbers to eight.

“We expect significant growth in the next 12 months and that’s already evidenced from the inquiries we got from [a recent] trade show and what’s coming from our recent announcement and major partnering arrangement,” Noller says.

In general however, key customers are sustainable builders, developers and government agencies.

Noller said there were two main reasons driving the need for the product:

• Green building codes. “We can provide access to real-time and historical data for water, power, gas and renewables” and
• The need for buyers to convey the green building credentials of their building to visitors, tenants and residents.

“Typically a green building has a lot of features that are not necessarily obvious, we can put these features or statistics up front and into the consciousness of every building stakeholder via a green building dashboard that puts the information right into the foyer,” Noller says.

But there is now doubt that the residential market is also a huge growth area. As energy prices rise, the ability to deliver ”granular data” into the hands of consumers will become increasingly sought after.

“When I say granular I mean far more meaningful data than an electronic version of your electricity bill,” Noller says

“Users need to know where, when and what is using the energy – what rooms, what devices, what time of the day, what day of the week so they can make informed decisions.

“We can monitor the whole of house mains power but we can also drill down into circuit level power monitoring and if you are using the Switch platform as a means of control then you can drill down into room and device reporting.

“This means we can show the home owner the big ticket items that are using the most energy so they can target the things that will get the best results. Once you know where the energy goes, you can start to put strategies in place to control it.”

The Sydney based company’s traditional hardware base automation product was developed from 2002-2009.

“In 2009 we realised that cloud based, open protocol systems would be the future for our industry,” Noller says.

“What was apparent to us was that our own business model and that of all our competitors – essentially a hardware model – was never going to deliver the growth that is predicted for this industry. In addition, the advent of devices like the Apple iPad would forever change the landscape of our industry affecting all participants from the manufacturer right through to the customer.

“Home and commercial automation has to be scalable, accessible, affordable and have a totally ‘green’ focus – green automation.

“So we completely redeveloped. This is a new technical architecture, a new platform and a new business model. We have had fantastic feedback already from the market but it’s challenging as we are essentially back to being a start up again so we have to completely rebuild our revenue base.”

Switch Automation’s cloud platform was on display at the CeBIT exhibition from 31 May to 2 June at the Exhibition Centre, Darling Harbour, Sydney as part of the NSW Government’s Australian Technology Showcase.

The ATS Program identifies innovative, market ready Australian technologies with global market potential.

The cloud platform is a total change in thinking for delivering automation services into homes and buildings, Ms Noller said.

“And we are not just talking about the technology – the cloud means a new architecture, a new delivery model and a new business model. Talk about disruptive and this is it. It changes not just our business, but those of the integrators, contractors and custom installers.

“In 2009 when we first aired these futuristic plans there were so many sceptics but to us it was crystal clear. We backed ourselves and built it anyway – a totally cloud based platform for homes and buildings with an emphasis on delivering the smartest sustainable buildings on the planet.”

Customer reaction to the promotion of the platform at the recent Custom Electronics Design And Installation Association annual trade show in Sydney proved the worth of the product, Noller says.

“It was so satisfying to see the customers recognise the benefits of what the platform can deliver and also that the installers identify with a business model that brings recurring revenue in return for the loss of margin on hardware.”

So how do houses rack up a $4000 quarterly energy bill?

Mostly it’s through airconditioning, underfloor heating, pools and irrigation for gardens, Noller says.

Acreage style properties in particular are huge consumers of energy, she says.

Large houses also have more lighting and more appliances, but “significantly it’s the underfloor heating, the airconditioning and the pool pumps,” that are the worst offenders.

The technology allows owners to make informed choices – either deciding to switch off the energy guzzling item or make sure it uses only off peak energy use.

Noller says Switch Clouds will be released on 20 June 2011.

– with Tina Perinotto

The Fifth Estate – sustainable property news and forum

“We can’t wait for the future”