By Caroline Noller, The Footprint Company
11 July 2011 – Letter to the editor: While many will hail the Carbon Tax announcement, it is worth taking a moment to consider the implications for the property sector.
In recent years, property has been the target of increased regulation due in part to its relatively silent nature in the political arena and certainly as compared to the influences of the mining, farming and energy sectors. This increased regulation has seen a decent increase in operating cost base to meet regulatory requirements but little or patchy evidence of commensurate energy efficiency cost reductions over the long-term.
At the governments’ proposed July 2012 starting rate of A$23 per tonne, the cost of buildings could increase between 2 per cent to 5 per cent depending on the building type and the extent to which the free permits delivered to the aluminium, steel, cement and glass industries are passed on. While on face value this does not appear to be a deal killer, when considered from an investor’s perspective, it means that they must increase face rents by at least this amount to cover the “incremental” cost of construction.
In addition, for pre-existing tenants, commercial occupancy costs could also see an increase of between 2 per cent to 4 per cent and if considered in terms of sales turnover for retail tenants, it could be between 0.2 per cent to 0.4 per cent of sales turnover. While it does not seem large, the combined impact in an environment where tenants are struggling, could have substantial and unforseen implications.
From a household perspective, a 2 per cent to 4 per cent cost increase for the average project home, for the average family may again not seem much. However, when considered in absolute terms, the once off increase could be worth more than 13 times the annual average household compensation package proposed by the Government. While not everyone will be a new home purchaser, with affordability of housing in Australia already beyond its limits, this impact could well have significant ramifications to the residential development and construction sector.
We have already seen an inflationary effect on building for energy efficiency regulation in recent years, which does not show strong evidence of delivering sustained or real long-term emissions reductions. This tax proposes compensation measures to households, large polluters and incentives to clean energy, but property is again likely to bear a substantive inflationary impact, which may have large and unforseen flow on effects.
Many in the sector will argue that it will all be irrelevant as everyone’s cost base will increase. However, we must contemplate the already stressed state of the economy; with margins pushed to their limits, an additional inflationary burden, even at this level, could have substantial impacts on new construction activity.
So, what are the benefits and outcomes? We could possible see a shift to retaining more structures rather than demolishing them and more refurbishment, which is good from an environmental perspective. Alternatively, we may see a shift to off-shore procurement to lower cost base countries – which is most likely for materials such as aluminium, some steel, glass and plastics but less likely for cement, masonry and concrete due to the weight.
We may also see investment in more sophisticated total carbon assessments that provide insights into the carbon pathways into a building and in particular ensure that the drive for operating carbon efficiency is balanced with capital carbon efficiency, so that they drive property to an overall lower carbon base.
All of these outcomes will leave winners and losers – the question is whether the government’s modelling has clarity on these.
The challenge is time. With 12 months to launch, projects on the drawing board now need to factor in price increases, those at an early stage should undertake whole of life carbon assessment and attempt to mitigate impacts through design.
For activity planned three to five years from now and for property trusts, they should undertake a whole of life carbon sensitivity analysis at prices of up to $50 to $100 a tonne and assess net income and occupancy cost impacts and review business plans for this alternative cost environment.
Dr Caroline Noller
The Footprint Company