FAVOURITES: 3 March 2010 – Five years after Cbus Property signed up Insurance Australian Group and other tenants to pay about $10 million in extra costs so their new premises at 181 William Street in Melbourne’s CBD would be a 5 Star Green Star building the property industry is still asking does “green” pay?
The question was the theme for a Green Cities 2010 session on ROI, or return on investment, and included the standard tough questions: what’s the valuation uplift for going green? Will tenants pay higher rents?
It was too much for City Metro’s Bill McHarg, the man who founded Colliers and then left to run a private campaign on climate change at the last federal election.
“We should have been asking this in 2000,” he told the audience. A better question was how to convince the owners of 80 per cent of the commercial buildings whose average age is 25 years that they need to retrofit, he said.
The chief executive of the Property Council of Australia, Peter Verwer, chaired the panel. Its members were: Nick Eggerton, research analyst for AMP Capital Investors; Rod Leaver, chief executive officer of Lend Lease Investment Management; Adam Murchie, vice-president of Australian Direct Property Investment Association; Adrian Pozzo, chief executive of CBus Property, and Elaine Prior, director and senior analyst for City Investment Research and Analysis and author of the recent investment door-stopper of a report, ASX-Listed Office Trusts: Does “Green” Pay?
Most of the panel agreed with McHarg, at least in part. The feeling was that for most sophisticated investors the question of “does green pay?” has been somewhat superseded by more strategic reasoning, especially if there is a desire to be prepared for whatever economic and environmental storms come lurching over the horizon.
Even in the global financial crisis (GFC), the momentum to green never really slowed, panel members said.
AMP Capital Investors’ Nick Eggerton said the GCF created a de-leveraging across the board, rather than selectively against green property. “Cutting out some of the ESD [ecologically sustainable development] practices would have been disastrous,” he said.
“The market requires ESD best practice to remain competitive. It was a fairly controlled cut across the board.”
Lend Lease’s Rod Leaver said: “Sustainability initiatives over the last couple of years haven’t stopped.” If anything, the GFC was a “real driver for innovation”, he said. “It forces you to work out how best achieve what you want to achieve when you haven’t got the same budget to work with.”
For Cbus Property, the feeling was the same. It might still be a tenant’s market “but the philosophy at Cbus is still green. A lot of it is about future proofing the portfolio,” chief executive Adrian Pozzo said.
This was the crystal note; de-risking the asset, avoiding costly retrofitting down the track and anticipating what tenants would want — especially if the owner expects to grab a blue-chip tenant.
The panel noted the observation in the market at times that comparing the return on buildings was like comparing apples with oranges because Green Star buildings’ income was higher only because they were occupied by blue-chip tenants. “Doesn’t that tell you everything you need to know” was the answer.
Pozzo added another driver to green: “We’re members of the United Nation’s Principles for Responsible Investments framework [which covers environmental, social and governance reporting] and we will develop a minimum of 5 Star Green Star and 4.5 star NABERS.”
Murchie said: “The green building movement is one of the rare exceptions of an industry that’s moved on its own [without government regulation] but the market virtually mandated itself by setting the benchmark — one- to six-star and not we’re not seeing anything [new] sub-five,” he said.
None of these drivers have an impact on his Australian Direct Property Investment Association members, who are generally smaller private investors.
Eighty per cent of the industry, “the mum and dad investors who have bought a building or two for their superannuation fund, are disengaged and the question is really how to educate those people and bring them up to speed,” said Murchie, echoing the McHarg’s thoughts.
Mandatory disclosure will do that. Mandated policy intervention is how you engage the bulk of people; it’s “what moves mountains the quickest”, Murchie said.
In terms of the proof of green value, Prior’s huge study drew a blank, but not a major one.Sure there was no evidence that green was good in terms of higher passing rentals or valuation, she said, but she did stress that the data set used in the report was small.
Nick Eggerton wasn’t fussed. Although the proof was not there, it was “not not there”. .His interpretation was that it will be just a matter of time before solid numbers start to back up where the top end of the market is heading.
Prior said that subsequent work, with more “granular” data, may prove a different case – that greener buildings do pay off, as was found in a much bigger study in the US by Nils Kok.
There is another issue that emerges from the debate: what is green building? Isn’t it always a better building, and don’t better buildings or better cars always cost more, at least in the short term?
Verwer said that when airconditioning became the vogue, yes, it cost more, and probably there was no financial data to prove it paid off, but you would need to be a brave investor to build a major office block without it.
He also noted that since the oil crisis of the 1970s buildings have continually tried to improve their energy efficiency.
Anecdotally, the industry has heard that tenant satisfaction makes for happier staff, which leads to higher productivity, but this is very hard to prove because most people enjoy going to a new building in any case.
However, several times during the conference people mentioned the results of a post-occupancy study for 500 Collins Street, Melbourne, refurbished to a 5 Star Green Star standard by its owners, the Kador group.
Some of the results of that survey, posted on the Green Building Council website, are as follows:
- A 39 per cent reduction in average sick-leave days per employee per month.
- A 44 per cent reduction in the monthly average cost of sick leave.
- A 9 per cent increase in the typing speed of secretaries.
- A 7 per cent increase in lawyers’ billings ratio, despite a 12 per cent decline in the average monthly hours worked.
Those are results not to be sneezed at.
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