By Adam Murchie, vice president, Property Funds Association

21 August 2011 – The Property Funds Association recently voiced its support for a carbon pricing system.  However, we believe the scheme needs to be widened to include complementary measures that incentivise the upgrading of existing properties to make them more energy efficient.

Property has a significant part to play in reducing emissions and we need to ensure that market forces do not favour the replacement of buildings over upgrades as improving the existing building stock is where the greatest inroads into carbon reduction can be made.

Commercial and residential buildings contribute more than one fifth of emissions in Australia. Given the inputs into property construction (such as steel, cement, aluminium, glass, gas and electricity), building owners and occupiers are likely to experience cost increases should a carbon pricing mechanism be introduced.

A carbon price will place a greater focus on building energy usage and the total cost of occupancy; therefore it could inadvertently accelerate building obsolescence where owners are unable to fund upgrades so that their buildings remain competitive.  It is likely that anything other than premium grade real estate will need support to remain competitive.

For this reason, the FPA firmly believe that a carbon incentivisation scheme for real estate is required to ensure the continued feasibility of existing stock and to avoid having a major gulf between old and new stock across Australia.

The carbon scheme, although environmentally sound, may pose a threat to the competitiveness of existing real estate and their occupants if the cost of upgrading buildings is left unaddressed.

In particular, it is imperative to address improvement in the performance of existing stock, given that its embodied energy and existing use of resources is far more sustainable than building new premises.

If support for building upgrades is not provided, the negative impact, particularly for secondary grade buildings that make up the majority of the stock, could certainly be a burden on the industry in five years time.  This will affect both property investment as well as business competitiveness and will hurt the smaller investors more than the larger institutional players.

The property industry is already a leader in sustainability, but it will need support to react appropriately to the changing economic environment that the Carbon Scheme, as proposed, may bring.  Without support, a potential outcome of the changes could be significantly higher rents for non-residential premises to offset the cost of building upgrades or a rise in outgoings.  With business profitability already at low levels, an added impost may be hugely detrimental to Australian businesses.

Furthermore, it’s the occupants of those buildings requiring upgrades who will be forced into higher rents to offset the cost of the carbon price.  This will reduce the competiveness of many businesses.  Alternatively, the outcome could be accelerated obsolescence for existing building stock, which may force values down and in turn, restrict capital investment across the sector.

I’m sure that it’s not the intention of the government to reduce the attractiveness of real estate investment, given its importance to the Australian economy.  In fact, we believe a partnership on this issue could achieve quite the opposite, especially as some of the greatest emission improvements at the lowest cost are possible from the property sector.

Technology has already been developed that can significantly reduce emissions. If support is provided to promote the upgrade to low emission technology, this would not only stimulate economic activity, but also potentially lead to Australia having the greenest building stock in the world, in addition to a relatively easy and cost-effective way to reduce carbon emissions.

Replacing old buildings with new ones is neither environmentally sound nor an efficient use of land and capital resources.  Upgrading is the key, and although some sectors of the market can absorb the cost over time, many, if not most, will not be able to without some form of support.

An incentivisation scheme could include any of the following:

  • Direct support to fund the implementation of technologies that substantially reduce emissions. The effectiveness of such a model could be based on dollars spent versus emissions reduced.
  • Accelerated depreciation rates for green building upgrades
  • Capital gains tax offsets for expenditure on green building initiatives
  • Rebates on energy efficient plant and equipment that lower the cost of occupancy through lower building outgoings, thereby increasing the competitiveness of Australian businesses

Key statistics relevant to greenhouse emissions and the property sector that need to be considered include:

  • Globally buildings generate 40 per cent of greenhouse gas, or GHG, emissions in Australia residential and commercial buildings make up 23 per cent of domestic emissions
  • Buildings use 32 per cent of world’s resources in construction and globally make up 40 per cent of waste directed to landfill
  • Building sector accounts for 19 per cent of total energy consumption
  • Energy usage by the commercial property sector is anticipated to increase 70 per cent (from 2007/08 levels) by 2029/30, or a rate of 2.4 per cent a year
  • GHG emissions from property are expected to increase 19 per cent (from 2007/08 levels) by 2029/30

We don’t yet know what the full extent of the carbon scheme will be on the property sector, but an area where we see opportunity is the $200 million Clean Technology Program, which supports business investment in research and development for renewable energy, low-emissions and energy efficient technologies to the benefit of all building owners Australia wide.

Furthermore, the $10 billion Clean Energy fund will support the deployment and commercialisation of renewable energy, low emissions intensity and energy efficient technologies.  Given the potential property has to reduce emissions, we believe that a fair share of these incentives should be directed to property, particularly given the long term life cycle of real estate.

In addition, we firmly believe the government needs to implement more direct action for property under programs like the Green Building Fund, and deliver on tax incentives under the green tax breaks program. This will help reduce emissions faster and bring other benefits such as increased employment and the development of exportable skills and technologies.

Adam Murchie

To this end, we have been working for over three years to prepare our members for the inherent changes in the property and investment sector, which will be brought about by climate change.  A dedicated PFA Sustainability Committee has been addressing the risks and rewards of the impact of climate change on property and has been arming members with tools so they can take meaningful steps to transition.

We believe that information is the key and we hope that given the right information, our members can make the right decisions. Like the Target 155 program for water savings in Melbourne, or the Green Star ratings tool, when armed with relevant information and a benchmark to aspire to, the market typically tends to change its behaviour for the better.

Adam Murchie is Property Funds Association vice president, a member of the PFA sustainability committee and a director of Forza Capital