– REPORT – 2 February 2010 -In one of the most definitive and widely discussed reports on green buildings in recent years, Citigroup Global Markets last month produced a rare insight into the motivations and impacts of sustainable property from the viewpoint of five leading property companies : Commonwealth Office (CPA), Dexus (DXS), GPT, Macquarie Office (MOF) and Stockland (SGP). The report is entiteld ASX-Listed Office Trusts: Does “Green” Pay?
See Part II
The report led by Citi’s Elaine Prior found that key drivers to going green are to “reduce carbon emissions and energy use, improve resource efficiency and improve employees’ working conditions,” or partly, “risk management”.
It also found that government tentants – around 33 per cent of the market – sought a NABERS Energy 4.5-star by 2011 in tandem with a Green Star sustainability ranking of 5 is increasingly regarded as the norm for new buildings.
And that demand for innovative and potentially riskier “6 star” designs is growing. As property trusts look to “future-proof” their holdings, buildings with lower rankings are becoming uncompetitive on multiple fronts.
Energy and water costs, waste disposal and carbon footprint aside, the report highlights research showing green buildings are increasingly seen as tenant drawcards, with some studies finding a positive correlation with employee health and productivity.
However solid evidence of the financial value of green buildings is still around the corner. “We await hard data that substantiates our expectation that ‘green pays’ for Australian office buildings, due to lower energy costs, higher rentals and lower vacancies,” the report says.
(In the US the evidence has now started to filter through, primarily in work by leading academic Nils Kok, based at Maastricht University in The Netherlands. See our story https://thefifthestate.com.au/archives/7289)
Following are highlights and extracts from the report, in which Ms Prior was assisted by Felipe Faria , Adrian Dark , Laurence Parisi and Jackie Tin:
- Tenants Increasingly Seek “Green” attributes — Government occupies around 33 per cent of
- Australian offices, and seeks NABERS Energy 4.5-star by 2011. Large corporates seek green attributes, perhaps as part of broader “sustainability” programs.
- Focus on indoor environment may grow, as companies seek to be “employers of choice”.
- In new buildings 5-star Green Star is becoming the “norm” (perhaps without extra capital expenditure, while 6-star technologies are seen as more innovative and may be riskier.
- Avoiding Obsolescence Risk — Buildings not meeting tenant criteria face higher vacancies, lower rentals and value deterioration, so meeting the market’s green requirements (most urgently 4.5-star energy) manages this risk.
- “At risk” may be lower performing government-occupied buildings. CPA, DXS & MOF appear more
- exposed than GPT and SGP, but all are actively addressing the issue. Intensive building management rather than substantial capital can yield big gains – MOF may be a leader here. A 1-star gain would save energy costs of $2-4 a square metre a year.
Extract (part 1) :
The Case for Green Buildings
Key drivers for “green” buildings are moves to reduce carbon emissions and energy consumption, improve resource efficiency (such as water use, recycling), and improve working conditions for employees (such as indoor air quality, open spaces).?Energy costs are rising, and the probable introduction of a carbon trading scheme in Australia will increase energy costs further, encouraging efficiency measures.
Tenants (particularly government and large corporates) increasingly demand green office buildings, with government policy to occupy buildings with a minimum 4.5-star NABERS (National Australian Built Environment Rating System) Energy rating.
New national Australian legislation to apply from mid 2010 will require mandatory disclosure of energy efficiency ratings for commercial office buildings. This will probably focus prospective tenants’ and purchasers’ attention on differences in building performance, and encourage demand for more efficient buildings.
Focus on the workplace environment in office leasing deals may accelerate, due to employee productivity, attraction and retention benefits.
A key argument for “green” office buildings is to “future-proof” the portfolio. Over time, office buildings that do not meet certain energy and sustainability criteria may suffer lower rental rates and higher vacancies, leading to faster value deterioration and potential obsolescence.
A 5-star Green Star (and 5-star NABERS Energy) is becoming the “norm” for new buildings, but 6-star can be more challenging and involve adoption of innovative and sometimes riskier technologies with less operational track?record. The most highly rated buildings are likely to include features such as chilled beam airconditioning, cogeneration or trigeneration, and grey or black water recycling.
Cogeneration (or trigeneration) is localised electricity generation, with use of heat for building heating (and cooling), avoiding inefficiencies and high greenhouse emissions associated with centralized coal-fired power generation.
It is used or planned for several buildings in this study (DXS 1 Bligh St; GPT workplace6 and One One One Eagle St; SGP Head Office).
NABERS criteria vary between states, particularly due to climatic variations and electricity grid emissions factors.
One catalyst for this study was an attempt to answer the question “does green pay?” with respect to Australian listed real estate investment trusts’ office portfolios. We found that, with limited data and history, the information was not adequate to draw firm conclusions.
Various third party studies provide insights into “why green should pay”. In theory, higher rental income and lower vacancy rates due to stronger tenant demand and lower outgoings (such as energy costs) should combine to yield a positive return on incremental “green” capital investment.
A hypothetical Australian study by Davis Langdon indicated a positive return on 5-star or 6-star Green Star when compared with 4-star, after considering carbon cost impacts, and a 1 per cent ($40 a square metre) productivity gain (due to a better working environment).
Another theoretical study showed an internal rate of return of 10-11 per cent for an existing building upgrade from NABERS energy 2.0-star to 4.5-star, since the upgraded building met the threshold to avoid the risk of obsolescence, but this study may overestimate capex.
A US study (Kok et al) based on local clusters of buildings found a positive link between green attributes and rent and value, but it is not clear whether the study adjusted for the likely situation that newer buildings are also greener.
Another study found 2.88 fewer sick days, 13 per cent higher rents and 3.5 per cent lower vacancy rates for green buildings, among US buildings managed by CBRE.
Lack of market data on green buildings presents a challenge for valuers, who generally use historical evidence in valuations. Vacancy data for Australian capital cities does not currently indicate a distinction between green and other buildings.
McKinsey & Co highlights substantial energy (and greenhouse gas emissions) savings achievable with positive payback in Australian commercial buildings, but barriers to unlocking these gains are not well understood. Some REITs report that in the current weak office market, investment in
energy savings does not result in higher rental incomes. Various schemes are under discussion that would provide regulatory incentives to improve building efficiency.
Studies Into “Does Green Pay?”
In theory, higher rental income, lower vacancy rates, and lower outgoings (such as energy costs) would combine to yield a positive return on the incremental capital investment needed to build (or refurbish) to “green” standards. Over time, we expect that tenant demand and higher energy prices will combine to increasingly support the economics of “green” buildings.
Various studies have sought to assess the impact of “green” initiatives on returns and valuations. “Green” buildings will tend to be newer buildings, so comparability can be challenging.
At this stage of industry development, actual data is limited. Some studies are based on surveys of attitudes, perceptions, stated intentions, or hypothetical buildings, whilst few studies are based on “hard” market data.
There is the possibility of study bias, since those who conduct such studies, or participate most actively in study surveys, may include the strongest proponents of “green” buildings.
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