Brian Churchill

24 November 2011 – At last Monday’s conference in Sydney, organised jointly by the Australian Property Institute and the Property Funds Association, it was clear that the industry – represented here by valuers and the unlisted and private owners of a huge swathe of Australia’s commercial property – was fascinated by the potential  for their properties to move up several notches in environmental performance.

Star of the event was the outstanding 76 Berry Street, North Sydney, the 25-year-old building just unveiled to the world by its owners, Local Government Super, after a makeover that that has earned it a massive six star NABERS Energy rating.

Emerging issues canvassed also included Environmental Upgrade Agreements, the lending facility for energy efficiency upgrades that ties repayments to council rates and “trophy green technology” ; in other words, what to avoid.

Speakers and panelists included:

  • Professor Spike Boydell UTS.
  • Nathan Fabian, chief executive officer, Investor Group on Climate Change
  • Siobhan Toohill, general manager, corporate responsibility and sustainability, Stockland
  • Brian Churchill, property portfolio manager, Local Government Super
  • Michael Cook, head of capital transactions & commercial development, Investa Property Group
  • Claire Orton, head of sustainability, Charter Hall
  • Patrick Dale, director, head of execution, environmental finance solutions, National Australia Bank
  • Mary Digiglio, lawyer, Swaab Attorneys
  • Catherine Bremner, chief operating officer, Low Carbon Australia
  • Simon Fox, associate director, Napier & Blakeley
  • John MacFarlane, Associate Professor University of Western Sydney
  • Joel Quintal, Jones Lang LaSalle
  • Rebecca Pearce, associate director, sustainability CBRE
  • Tina Tang, director, Jattca
  • Roger Walker, director Walker EcoStrategies, MC
Left to right: Claire Orton, Michael Cook, Brian Churchill

76 Berry Street, North Sydney

LGS’s Brian Churchill explained how LGS turned a tired, 25-year-old building in North Sydney into a 6 star NABERS Energy building that outperforms on almost every level.*

In the panel session that followed, Investa’s Michael Cook and Charter Hall’s Claire Orton, equally good naturedly thanked Churchill for raising the bar… oh, just a little sky high.

So what were the outcomes, the financials and the strategy on the building?

Some of the project highlights

Churchill said the savings on outgoings will be $6 a square metre net, with a reduction of 3 per cent and forecast increase in rent of 3 per cent. The team did not include Colonial’s forecast $2 a sq m estimated cost of the new carbon tax.

“The average lease expiry of the building meant the rental uplift would not be recognised immediately,” he said.

Claire Orton

He said one of the key technologies, The Shaw Method of Air Conditioning, or SMAC, provides higher comfort  levels and “gives tenants more productive space”. A recent CTEC study has backed this view, Churchill said. “You get a 4 per cent productivity lift without doing anything else.”

Basically it is a “bolt on” technology to the existing airconditioning system. “It controls the temperature and the humidity. And the pre-treatment of the air means the plant doesn’t have to work as hard,” he said.

Likewise, the lighting E1, a huge leap on the T5 still commonly used, generated savings. Asked by a member of the audience why LGS chose to upgrade the lighting for the tenants, Churchill replied the savings on energy lessened the impact on the airconditioning.

Even more exciting, he said, was the business case.

The total project cost was slightly under $6 million.

This equates to about $506 a sq m, and compares to the 2009 PCA/Arup report on retrofitting buildings to 3 to 4.5 star NABERS standard that estimated about $760 a sq m.

The interesting part is that the building was already scheduled for upgrade anyway ­ – the business as usual case – including new chillers, new building management systems, and new lighting.

Left to right: Geoffrey Learnmonth, Simon Fox, Mary Digiglio, Patrick Dale

The Green Building Fund contribution was $2.1 million, “So that was a call to action,” Churchill says. “It was important to the feasibility.”

The forecast now is for higher rents of about 3 per cent. “All up the advantage is $280,000, so return on the project 21.5 per cent and 4.6 year payback period.”

The other really exciting thing is that older existing buildings can perform to world’s best practice, using Australian technology.

“The technologies are the world’s best; you may as well use them.”

But he added , it was also important not to get caught on “trophy” upgrade items that would not stack up financially.

Implications
Moderator Roger Walker, of Walker EcoStrategies, asked the panel what the implications of the building’s achievements would be for the industry.

For Investa’s Michael Cook they were huge. “The implications are huge. I’ve got to congratulate Brian on his achievements. It’s got my team scratching our heads and I think it’s fantastic. We’re in a very competitive industry.”

The Australian property industry was among the most competitive in the world and the most competitive in Australia, Cook said.

“I see some of the things Investa does, and it’s part of our DNA, and I think what we have achieved is important for the industry but because we put ourselves out there as being high quality proponent the GPTs and Stocklands and Charter Halls see fit to do a little bit better than we do and that’s really interesting because what it means is that we have to do that little bit better.

Catherine Bremner

“And now all of a sudden Brian’s come from nowhere and proven what we’ve always felt, that it’s more efficient from a long-term perspective   the stock we’ve got rather than knocking down buildings and building new ones. Which would probably be four star anyway.

“So that’s one of the critical things, that yes, 25-year-old buildings can be best in class and demonstrate that sometimes strong management and good leadership are the most important things in our business.”

Investa, said Cook, had been in the process of selling buildings recently but in the next six to eight weeks would be buying property and considering life cycle analyses for these buildings to ensure they could come up to a 4 and 4.5 star NABERS energy rating.

Ensuring highly rated buildings made them easier to sell, especially to foreign companies, he said. “They hear what Investa does and know that the building will be pushed to the limit on sustainability.”

What’s next for LGS?
There is to be no resting on laurels, that much was certain. Churchill said that the board had instructed that by the end of 2012 the entire portfolio would need to average 5 star NABERS Energy.

“No pressure at all,” Churchill laughed, adding: “but we are on the way… not just in offices but shopping centres as well. That’s the stretch target we have given ourselves.

Michael Cook

“We think we are capable of getting there, especially given that the technologies that have uplifted their performance [in recent times] and that prices haven’t moved that much.”

Charter Hall
Charter Hall’s Claire Orton was impressed with LGS’s ambitions.

Charter Hall had plans for one of its funds to achieve an average of 4.5 stars, Orton said, but it needed to be delivered within existing capex (capital expenditure).

“So we have plans in place across our buildings. Whether we can deliver those in the next two years, I would say is unlikely.”

“I take my hat off to Brian,” she said.

Cook said that for Investa, there was always  a strong focus on the commercial equation in any environmental upgrade.

Churchill noted that while most investment organisations needed to prove the commercial viability of their environmental programs, the LGS board took the opposite stance: here’s what the portfolio needed to achieve, it was up to his team to work out how to do it, he said.

Tax breaks for green buildings?
Adam Murchie, director of Forza Capital, and vice president of the PFA, asked Churchill if he would do the upgrade work under the $1 billion tax break model offered by the Federal Government, which is currently under review.

Churchill said the tax breaks model would not have been of much interest to LGS.

Mary Digiglio

“Being a super fund, the tax driven models are not very interesting to us – namely we are taxed at 15 per cent and we have enough depreciation and other deductions to make sure we never pay tax, so accelerated depreciation is not very interesting to us.”

The thing about the GBF, Churchill said, was that it provided the ability to halve the cash investment.

The GBF was good but the tax benefits don’t really add much to the equation, he said.

Cook said: “I’m not sure whether the carbon tax or tax benefits will make us do any better, but as we said, our industry is terribly competitive and the innovation will happen anyway because there is a commercial imperative.”

One possibility for innovation was to commercialise trigeneration space as Investa had achieved at Coca-Cola Place, previously The Ark, in North Sydney. Cook said the company would now factor the search for this type of space into its search for new buildings especially if the energy could be shared at a precint level.

It would also help if local government could see its way to deducting space for tri-gen or change rooms and locker rooms for bike riders from allowable allowable floor space, given these fit with the city’s green plans, Cook added.

Tina Tang

On Environmental Upgrade Agreements

A session on EUA, a program facilitated by legislation that allows loan repayments for energy efficiency upgrades to be placed as a lien on council rates, was also of interest at the conference.

NAB’s Patrick Dale said the bank had $60 million to invest in the proram and was keen to start.

Napier & Blakeley’s Simon Fox it was a similar view. The company had launched Verdigris Capital to help clients with upgrade work. About 75 per cent of its work was in retrofits in any case, Fox said, so the step into the EUAs made sense.

Tenant advocate Geofrey Learmonth said there were fine details to work out. He had “never yet met a tenant who didn’t want a cleaner, greener office space” but the devil was in the detail, and whether or not the tenant would indeed be better or no worse off, as promised.

Swaab attorneys Mary Digiglio said many of her clients were B and C-grade building landlords and they were keen to understand the opportunities.

*76 Berry Street, North Sydney upgrade project highlights:

Project Cost Breakdown

  • Total costs all upgrades $506 a sq m                                                           $6,000,000
  • Business As Usual life cycle costs $223 a sq m                                          $2,600,000
  • Green Building Fund contribution $180 a sq m                                        $2,100,000
  • Net cost of trigeneration and upgrades $112 a sq m                                 $1,300,000

Business As Usual Costs Breakdown

  • Lighting replacement                                                                                      $   600,000
  • Airconditioning, including chillers, cooling towers                                 $1,315,000
  • Common area lighting                                                                                    $     95,000
  • BMS                                                                                                                    $   250,000
  • Switchboards                                                                                                    $     50,000
  • Airconditioning, fans, coils & filters                                                            $     90,000
  • Pneuma Valves replacement                                                                         $   200,000

Total                                                                                                                          $2,600,000

Business Case Variables

  • Net energy cost saving (incl. trigen maintenace) or $6 a sq m*             $   70,000  pa
  • Reduced Outgoings 3 per cent                                                                     $   35,400  pa
  • Higher rents in prospect, 3 per cent, rise of  $15 a sq m                        $  175,000  pa
  • Other income streams (trigen to tenants) in prospect not valued $   40,000  pa
  • Return projected 21.57 per cent or 4.64 years payback
  • Cap rate compression  0.20%                                                                       $1,500,000
  • Repositioned to A grade building in prospect
  • included in cap rate
  • Inflation hedge against grid price increases                                                Not valued
  • Reduced letting up periods                                                                             Not valued
  • Reduced incentives                                                                                           Not valued
  • Carbon tax saving est. $2 a sq m pa  $23,300  pa                                      Not valued

*a further reductions in outgoings of $3 a sq m is expected due to the newness of the updated plant.

Changes in Business as Usual

  • New chillers: was greenhouse gas friendly upgrade R134, now Power Pax high efficiency
  • New lighting: was T5:  8-9 Watts per sq m, now E1, at 5.8 watts per sq m
  • Airconditioning strategy: Was temperature management, now SMAC upgrade – temperature & humidity

Current Performance

  • 4.5 Stars NABERS (excluding Green Power)
  • 6 Stars NABERS (including Green Power)
  • Water 3.5 stars NABERS
  • Energy intensity 452 MJ/ a sq m annually
  • One of the lowest in North Sydney
  • Opex (operating expenditure) $91 a sq m annually

Project Team

  • CBRE – Project implementation, property management, site coordination
  • HADENS – Head contractor on site
  • MPES – Design and technical advisors
  • Walker EcoStrategies – Project Director & Consultant
  • Napier & Blakeley – Strategy & funding management