The ratings challenge

Steady progress is being made in refurbishing existing buildings. A total of 18 percent of CBD office space is now Green Star certified and the number of NABERS rated office buildings has grown significantly over the past 12 months.

This green refurbishment agenda is being driven by several factors. Tenants have increasing expectations for environmentally friendly spaces. The Commercial Building Disclosure scheme, which came into effect in November 2010, has also had an influence.

Matthew Clark, acting divisional director sustain-ability programs at the NSW Office of Environment and Heritage, says the leading edge end of the market is also driven by the value green retrofits add to their buildings.

The value is evident – research shows sustainable buildings achieve better returns. The Property Council/IPD Green Property Investment Index, which surveyed 409 assets worth $45.7 billion at June 2011, is based on what is occurring in the market, rather than perceived outcomes.

It found Green Star rated buildings provided a 9.3 percent total return for rated prime buildings, while all prime office achieved an 8 percent total return.

Green buildings also have lower vacancies – buildings with a 4 to 5 Star NABERS rating recorded vacancies of 1.8 percent, compared to 2.1 percent for all prime office buildings and a rental of $446 per sqm compared to $403 per sqm, according to the index.

Government is also playing a role. In Melbourne, the 1200 Buildings program aims to retrofit two-thirds of building stock in the CBD, according to the Green Building Council of Australia (GBCA).

The City of Sydney also has the target of achieving an average 4 Star NABERS energy and water rating for 50 percent of NSW’s commercial floor space by 2020.

The office sector has led the charge. However, John Dillon, fund manager for APPF Commercial and APPF Industrial at Lend Lease, says other sectors, such as industrial, are still in their green infancy.

“Industrial is challenging because of the nature of the sector, where you often have large single occupiers who have operational control of their leased premises and net lease structures,” Dillon says.

“It’s difficult for building owners to justify significant capital expenditure when there is no direct commercial benefit.”

Dillon says the way forward for the industrial sector is for landlords to find common ground with tenants so both parties benefit financially. For example, in the APPF industrial portfolio, it is working on a number of lighting initiatives where both the landlord and tenant benefit from reduced energy costs.

“We have also seen a great deal of interest in this sector for the uptake of large rainwater collection and reuse systems and photovoltaic systems,” he says.

Andrew Aitken, executive director – Green Star at the GBCA, says demand for retail and industrial Green Star registrations are growing – and will continue to grow.

“When the CBD program is expanded beyond offices to retail and education buildings, this will also drive green retrofits,” he says.

Funding barriers

Funding and cost is one of the central barriers to green refurbishment. One new funding model currently being discussed is environmental upgrade agreements.

James Redwood, manager information, technology and communications on the Hansen Yuncken and Leighton joint venture, has been involved with the development of the new model and believes the industry is too reliant on grants.

"If it only gets up on the basis of a grant, then it really doesn’t stack up as a wholesale solution across the marketplace,” he says.

Dillon says landlords need to generate a commercial return from their expenditure through either higher rent, lower operating costs, shorter letting-up periods or better long-term retention rates.

Financial incentives also have a role to play.

“[We] encourage additional mechanisms such as tax breaks for the greening of assets which could provide a longer term incentive, so long as the architecture of the scheme can overcome the split incentive issues and be relevant to supporting the vast number of existing assets managed through REITs,” says Michael Gordon, general manager at Buildcorp Interiors.

Design

The design challenges of refurbishing existing buildings can also be a barrier – working within the existing structure poses limitations and working around tenants can be problematic.

David Rose, NSW managing principal at Suters Architects, says the main design challenge is integrating sustainable elements in a functional and aesthetic manner while also establishing an energy rating.

“Similarly, the complexity of the design presents its own level of challenges. Updating an old office building to a current office workspace, while having some difficulties, is a relatively straightforward exercise compared to ‘re-lifeing’ a former industrial workshop to current office workspace standards,” he says.

While the limitations of designing within an existing building can be challenging, changing technology has made it easier to take a building from 2 stars to 4 stars, according to Gordon.

“One of the critical elements, though, is the facade. Older buildings obviously don’t have the benefits of today’s modern facade systems … But the main components really come down to mechanical and electrical,” he says.

Buildcorp’s Big Bear project at Neutral Bay, on Sydney’s lower north shore, is one example of how green refurbishment can be completed on a tight budget. The seven-storey commercial tower was constructed in the mid-1980s and had an original NABERS rating of 1 Star, with the upgrade achieving a 5 Star rating.

The refurbishment was purely focused on services, particularly the HVAC system. Buildcorp replaced the existing chillers with high efficiency chillers, installed a new BMCS, new boiler and heating coils and energy meters.

“Given the current financial climate, everyone is focusing on the lower hanging fruit … [some things] don’t come at a huge cost, but do have a very measurable and great benefit to the actual performance of the building,” Gordon says.

Some buildings can also achieve considerable sustainability improvements by installing meters to measure how and where energy is being expended, according to Rob Dickie, director at Green Leaf Engineers.

“Other things that are highly cost-effective are retrofits of lights. The simple things like that and fixing up motors and basic low cost retrofits that use proven technologies … [can provide] a really significant opportunity,” he says.

The future

Redwood says around 60 percent of Australia’s existing stock needs to be upgraded if carbon emissions are to be reduced.
However, he says while it is the top end of the market leading, there needs to be a reason to want to upgrade sustainably.

“Mandatory disclosure is a driver, and we’ve got tenant attraction as a driver and we’ve got corporate social responsibility as a driver, but there’s very little incentive there other than that,” he says.

Dillon agrees and says greening existing building stock provides an opportunity for fast, cost-effective greenhouse gas emission reductions across our cities.

“However we are yet to find the right mechanisms, in both carrot and stick, to really drive the case for larger scale investment and activity in this space,” he says. “Let’s hope we’re not far off in unlocking this potential.”

Environmental upgrade agreements

Environmental upgrade agreements (EUA) are a voluntary charge on the land imposed by local council, which is funded by private sector finance providers and repaid through savings tenants make in reduced energy bills.

This funding model makes it easier for the industry to access funds as the funding is attached to an asset instead of an individual or company. It is also an attempt to overcome the split incentive between the owner and tenant.

Melbourne has already paved the way for EUAs, with the first one signed in October this year for a $400,000 retrofit of 460 Collins Street.

The City of Sydney has also resolved to complete up to 10 environmental upgrades under EUAs in the next 12 months, according to Matthew Clark of the NSW Office of Environment and Heritage.

While NSW’s model has been based on Melbourne’s, it has been slightly modified. For example, tenants are not required to sign an agreement. When costs are recovered, the building owner can use an estimate of energy savings as a basis for recovery.

However, building owners need to demonstrate tenants will make savings and can only recover costs up to the amount they expect the tenant to save.

Should building owners change during an agreement, owners have two options – sell the building with the EUA attached or pay out the remainder of the loan.

The property industry, banks and councils have all shown interest in the concept. However, Clark admits some in the industry are cautious about how it will be adopted, particularly from an accounting point-of-view, and whether it will be treated as a liability on the property.

Using this type of funding model will allow repayment over a longer period of time, around seven to 10 years, according to Clark, which would enable environmental upgrades with a longer payback period. Ultimately, though, the duration of EUAs will be decided by finance providers.

“We see that it’s a win/win situation and we think it’s got a really strong potential to transform the market,” says Clark.