This is the second in a short series of articles that examines the carbon price and its impact on property.

23 July 2012 – It’s week three of the carbon price, and it’s starting to look and smell like a game of dominoes, with costs being hand-balled down, down, down… all the way to the consumer.

Let’s look at how our property sector’s getting on.

Is it taking the brunt of the pain or following suit and passing the costs through to tenants? Or is it looking at any potential gains?

Building owners are not exempt from this game of dominoes. They are also being hand-balled the costs from many angles. Mainly it’s from energy retailers passing through increased generation costs and manufacturers of building materials that have also upped their prices, and passed them down the chain.

If you’re building a new building, doing a fit-out or leasing a building to existing or prospective tenants, does this game of dominoes stop with you? Do you suck up these costs or do you simply hand-ball it down the chain? Everyone else is playing, you’re contractually allowed to, so why shouldn’t you?

While this approach may help balance the books in the interim, it’s likely to impact a building owner’s competitiveness in the long term.

For building owners, the potential pains and gains from the carbon price will be different, depending on where they are in the property life-cycle.

Build or retrofit – focus on construction materials and life cycle operation cost
Whether you’re building a new building or retro-fitting an existing building, the impact of the carbon price will be felt largely through an increased cost of energy and building materials.

While a building owner has little control over these direct costs coming into their business, they can plan their new or existing building with efficiency in mind, specifically in high energy-using equipment.

Like it or not, a building designed and built today will compete with a building designed in 10 years’ time. The systems in today’s building will not only need to meet today’s standards (such as the Building Code of Australia/National Construction Code’s Section J on required greener outcomes), but also pre-empt standards of the future, which will be more rigorous than the standards of today.

Now is the time to build in flexible systems with high efficiency equipment. If the investment in the building infrastructure is made now, an upgrade in 10 years’ time will be far more cost effective.

The key is to selecting the right equipment for the purpose. To get it right, you need to understand the operational cost of that equipment and build this knowledge into equipment selection decisions. Too often businesses have been constrained by budgets and invested in sub-standard systems that are poorly designed and not suitable for the purpose. Making an informed decision now will save you a lot of pain and money in the future.

By investing in energy efficient systems, the operational costs of the building will be less and therefore far more attractive to any existing or potential tenants leasing the building.

Occupied – focus on implementing medium term opportunities
While it is largely contractually acceptable for building owners to pass the impact of the carbon price through to tenants under outgoings, this is only sustainable within existing leases. One thing remains a certainty these days, tenants shop around to find the best deal. As energy costs rise due to increasing utility rates and the cost of carbon, comparable properties with lower energy use will gain competitive advantage in the market.

If building owners leave it too late to implement energy efficiency, they won’t have time to demonstrate results. Implementing energy reduction projects and seeing the results in energy costs and NABERS ratings takes more than 12 months.  Rarely is there the luxury of discovering a silver bullet project for quick implementation and results.

Some building owners have focused on working with their tenants to implement energy efficiency and sustainability measures.  While the results are not reflected in a base building NABERS rating, tenants see the property owner as proactive and supportive in reducing building costs and environmental impact. Examples of this are providing financial support towards undertaking a NABERS Tenancy rating or implementing initiatives to improve recycling rates and reduce waste to landfill.

Building owners need to plan one to two years ahead to identify a range of measures that will reduce their energy usage and carbon emissions.  These can be implemented over time to minimise the impact on tenants and the results will be demonstrable before a lease is negotiated.

Attract and retain tenants – focus on implementing quick win and visible opportunities
Building owners of poorly rated, less efficient buildings with space for lease or large tenants renegotiating a lease, face the biggest immediate impact.

In a competitive marketplace, an existing building is compared to other existing buildings and to new buildings. Higher energy costs will be reflected in higher outgoing costs. A prospective tenant will evaluate the total cost of rental and this cost will be less for a more efficient building.

In this scenario, there are no quick fixes. It takes time for the effect of reduction activities to be seen and then reflected in benchmarks and assessment tools.  Despite this, some activity is better than none.

While the current NABERS rating will need to be disclosed, prospective tenants can also be advised of a future target rating. A building owner can even write a minimum NABERS rating into the lease. Of course, if this step is chosen, there needs to be a thorough understanding of the potential opportunities and what they will cost.

Environmental Upgrade Agreements
Properties in NSW or Melbourne may be able to undertake the improvements as part of an Environmental Upgrade Agreement  that would allow the costs to be passed through as outgoings.

Looking at your portfolio of building stock, where do your buildings fall in this cycle? What is your strategy for each of these buildings to remain competitive in the market?

These things need to be considered now as any tenant (existing or prospective) will be vigilant as to any costs passed to them from the carbon price. Building owners who take action now will see the competitive benefits in the medium to long term.

Plan your building, new or old, for the future and don’t let this innocent game of dominoes turn into a game where the tenant’s final words are “you are the weakest link, goodbye!”

Tim Parker is energy and  climate change leader for WSP Buildings