By Adam Murchie

FAVOURITES – 24 March 2010 – At a recent sustainable property conference, there was discussion about the emerging divide between large corporate and institutional property owners, who understand and appreciate sustainable property ownership, and private individuals and syndicators, who appear to be poorly informed, and what this means for the industry.

At face value, such a lack of awareness is typically not problematic. However, once you peel away the layers and consider the broader ramifications, a very interesting picture of the property market begins to emerge.

Later this year, the Federal Government is likely to introduce mandatory disclosure legislation, which will place strict requirements on owners and tenants of buildings that are bigger than 2000 square metres in net lettable area. If introduced, the legislation will mandate the rating, energy use and maintenance to be reported on, and disclosed, on the sale, or leasing, of a qualifying building.

While it is still opaque as to the sanctions for non-disclosure, what is clear is that this new reporting structure will provide another element of differentiation for building owners in the sale and leasing of their premises. Essentially, information arising from mandatory disclosure will be used to address each individual building’s value proposition; that is, the nexus between the cost and benefit of occupying or owning the building.

As one would expect, buildings that are rated under either NABERS or Green Star, or buildings that have had their environmental performance improved, should score better on disclosure than unimproved buildings. In financial terms, the outcome will be that the cost of occupying such buildings (on a rent and outgoings basis) will be less than the cost of occupying a similar, but less energy-efficient, building.

This occupancy cost/benefit scenario may be further compounded when one also considers the emerging evidence of other benefits of occupying sustainable premises, such as productivity improvements, absenteeism reduction and staff attraction and retention.

Once the markets digest and disseminate these factors, tenants and owners will be able to apply such information in pursuit of an economic benefit – a quasi-arbitrage between high and low energy-efficient buildings. Tenants will seek to occupy highly efficient space which, when addressing the total occupancy costs and benefits, may offer better outcomes when compared to the alternatives. In turn, this will provide the owners of such buildings a significant competitive advantage over their peers, whereby their assets may be differentiated on the basis of pricing, benefits or perception.

If this rings true, economics suggests the emergence of a two-tiered market in which poorly performing stock is likely to trade at a discount to more efficient stock. This, obviously, has significant ramifications on asset values, building lifecycles and obsolescence and will result in a swift and profound value shift as capital markets seek the most efficient (and risk-adjusted) form of investment.

Herein lies the nub of the issue: given our need to urgently shift the property paradigm and transition the market to a more sustainable future, are we best sitting back and letting market forces do their thing, or are we better off giving a “helping hand”?

The best opportunity to transition the market in the shortest time frame is to use not only the efficient forces of capital markets, but to use the education and knowledge available to transition the whole market, not just parts of it.

At present, there are structural flaws in how the very broad, and fragmented, concept of sustainability is communicated to the market. If you are a private individual who is exposed to the mandatory disclosure requirements and you do not have the luxury of a dedicated sustainability employee, a team of consultants or an army of staff who can address and aggregate such information, how do you become informed? And where do you start?

One possible solution could be to use existing conduits (statutory bodies like local government; services authorities or property agents/property managers) that are actively connected with the property owners to disseminate critical information. Given the need for society to dramatically reduce its ecological footprint, addressing these structural impediments and improving awareness could act as a significant lever in stimulating greater investment in sustainable property outcomes.

History tells us capital markets are far more adept at changing market direction than pure policy and regulation. Mandatory disclosure will certainly play its part, but a combination of improved awareness and market forces may be a more efficient and effective way of creating the behavioural change required. Certainly, in a fully informed market, participants will pursue the most-effective capital investment available, and given the emerging risk/reward profile of sustainable property, it would be well-placed for significant investor support.

Is it likely that such an awareness process will be implemented in the short term to facilitate an accelerated transition of the sustainable property sector? Probably not, although awareness initiatives such as the Target 155 water strategy in Victoria have yielded very significant outcomes using a similar process.

One thing is certain, however. If mandatory disclosure is passed as legislation, it is going to result in a watershed for the property industry. As the true performance of buildings becomes known, there is likely to be a reallocation of capital and a shift in the traditional assessment of risk and reward. Whether ill-informed investors are as

Adam Murchie

exposed as we think remains to be seen. However, the requirement to be prepared for the potential of significant structural change is imminent.

There is nothing wrong with being prepared and it may just be the competitive advantage one seeks.

Adam Murchie is a director of boutique property investment business Forza Capital, and vice president and member of the Sustainability Committee for the Australian Direct Property Investment Association.