Everyone Wins with Building Upgrades

Monday, June 23rd, 2014
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Around four in every five commercial buildings in Australia were built before 1990 – sometimes decades before ‘sustainability’ became part of the property vocabulary. Most of these office buildings are poor environmental performers, but this makes them prime candidates for environmental upgrades.

While the top end of town understands the benefits of a green rating – from attracting talented employees to demonstrating corporate social responsibility – the ‘big middle’ is not so convinced. There remains a hint of scepticism in this large section of the market about how much money can really be saved despite the case studies that offer positive proof.

The barriers are undeniable: financial risks, capital constraints, disruption to tenants and a general lack of tenant demand. Smaller building owners tend to be driven less by energy efficiency and corporate social responsibility than large building owners, and they are also driven more by timing, capital costs and payback periods.

Large portfolio owners are more likely to see the connection between sustainability and future income, while smaller building owners don’t have the luxury to sacrifice short-term income for future gain.

Large portfolio owners operate from their own balance sheets, enabling them to obtain relatively cheap finance. It’s a different story for smaller building owners.

Anecdotal evidence suggests that many tenants in lower grade buildings have long-term leases and have little motivation to change. There’s also the problem of ‘split incentives,’ where the building owner wears the cost of an upgrade while the tenant gains the savings.

Environmental Upgrade Agreements (EUAs) overcome many of these obstacles.

An EUA is a funding arrangement that enables the financing of large capital upgrade works to existing commercial buildings. A finance provider lends funds to a building owner for energy, water and other environmental upgrades, and this low-risk loan is repaid through a local council charge on the land. Tenants, who gain the benefit of the upgrade, can contribute to the costs, overcoming the obstacle of the split incentive.

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123 Queen Street

Success stories are starting to emerge. The Sustainable Melbourne Fund, for instance, has facilitated $12.6 million in energy and water efficiency finance, resulting in more than 6,000 tonnes of carbon abatement.

At 123 Queen Street in Melbourne, a 380-kilowatt trigeneration system has lifted the building’s NABERS rating from two to four stars. The $1.3 million project was financed under an EUA signed between the Sustainable Melbourne Fund, NAB, Low Carbon Australia Limited and the building owner, Eighth Grange, and is predicted to save $180,000 a year in energy bills as well as 2,500 tonnes of carbon annually. The green retrofit has a payback period of just over seven years.

In Sydney, Parramatta City Council’s EUA program has financed the upgrade of 100 George Street. The $6 million retrofit included a new air-conditioning system and a façade upgrade, which have halved energy and water consumption and increased the building’s NABERS rating from one to four stars. The upgrade is expected to increase rental returns by as much as 25 per cent, reduce annual outgoings by $96,000 and improve the building’s value by $6 million.

In both of these cases, the local council reduces its carbon footprint and improves the quality of its building stock, the tenants get a more attractive, cost-effective building, and the building owner gains a future-proofed asset. Everyone wins.

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