21 December 2011 – Forget the feel good factors in energy efficiency or climate change. At the end of the day, according to green enthusiast Harry Chua, it’s the beautiful set of numbers on the bottom line that make the recent deal to upgrade his office building in the Melbourne CBD speak volumes.
Chua is the Melbourne investor who this week revealed he has signed up with the National Australia Bank for Australia’s first privately funded environmental upgrade agreement for his building at 123 Queen Street in the Melbourne CBD.
Another EUA deal, for the Kings Technology Park in Dorcas Street South Melbourne funded by Sustainable Melbourne Fund for the Melbourne 1200 buildings program was announced on the same day.
On Tuesday, Chua spoke to The Fifth Estate to explain what compelled him to become a pioneer in a lending facility that was still untested, but has captured the imagination of major investors in Australia and the US, former US president Bill Clinton and Virgin chief Richard Branson.
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In Chua’s view, yes, the deal is good for the environment; it’s good for marketing, for staff morale, for tenants and for clients of all descriptions who want to know how the building owner is managing the asset.
But above all it’s good for the bottom line, says Chua. And this is the point he wants to make clear.
The building, at 123 Queen Street, will be upgraded with a trigeneration gas fired energy system, light sensors and double glazing .
Here’s how the numbers go:
- Total energy bill before the upgrade, $350,000 a year
- Energy savings with the upgrade, $180,000
- Return on investment, 11.79 per cent
- Payback, 8.5 years
- Total cost of funding of the EUA, 7.7 per cent
- EUA loan from NAB, 1.34 million
- Total cost of upgrade including loan plus additional “preparation costs,” $1.54 million
Chua, a medical practitioner who now concentrates on his property and hospitality portfolio and prefers to keep a low profile, defied his reticence to speak to The Fifth Estate, in the interests of sending out a message about these numbers.
“Sustainability is something I have a passion for,” says Chua, who is a director on the board of advisers for Climate Alliance. However, such concerns are irrelevant to many property investors, he says.
“Some people might want to do this sort of work because they have a passion for doing the right thing environmentally, but if it doesn’t make commercial sense, most people won’t do it,” Chua says.
“There are a lot of people who don’t believe in the cause, in climate change. But at the end of the day that doesn’t matter if this makes sense financially.
“So we want to make sure this works financially. That’s the message we want to get out.
“With the $180,000 per annum in savings, that’s a return on investment of 11.79 per cent. That’s pretty much an 8.5 year payback.
“If electricity goes up 30 per cent it will dramatically increase,” Chua says.
“On top of that we have a Green Building Fund loan which makes it a 17.3 per cent return on investment.
“But even without the Green Building Fund grant the cost of borrowing from the EUA is 7.7 per cent all up and the return is 11.7 per cent. So it’s positive and the cost of electricity will become more expensive, so these figures are a worse case scenario.”
The upgrade work is over a 1960s building with an unusually complex blend of uses over 16,240 square metres of lettable area.
There is a 72 room four-star hotel, multiple bars and nightclubs, function room with licence for 2000 people and conference facilities, plus retail and office space including for Chua’s own staff to run his property portfolio.
Chua describes the building as “pretty much inefficient”, with a NABERS energy rating of about one star.
“Our carbon foot print is 4800 tonnes per annum and the savings will be 1300 tonnes…per annum. That’s a 27 per cent reduction in carbon footprint print.
“We do use a lot of energy and to be clean [green] would be fantastic. Also as a marketing exercise,” Chua says.
“When people inquiry about functions and training rooms they want to know, what is your stand on sustainability? And we can say, we are doing this and in 12 months time we will be carbon neutral.
“It’s a good story for our kids and our future and it makes sense marketing wise.
“To bring it up to four star [NABERS energy] will make tenants will feel better.”
Chua wants to make the building to be 100 per cent carbon neutral by the end of 2012, with the balance of carbon savings purchased through carbon credits.
Work has commenced an the trigeneration system ordered and expected to be operational by the fourth quarter of 2012.
Twist in the tale
An interesting twist is Chua’s decision to pick up the tab for the loan himself, but this is a decision with a kicker in it.
Most of the tenants are on gross leases, and some on net. So those on gross leases do not pay additional charges for outgoings; these are incorporated into the overall rent. While those on net leases pay for outgoings separately.
In the Melbourne version of the EUA agreements each tenant in the building needs to agree to the scheme, with the proviso that they be no worse off.
But with multiple tenants on a mix of gross and net leases, Chua decided it would be easier to pick up the tab himself.
“We’ve done all the financials. We are not passing on costs on to the tenants; it gets complicated and is very hard to understand how the savings will work out.
“The way I saw it, I will pick up the cost and the savings will amount $180,000 per annum in energy. The gas bill will cost more but we will save on electricity.
The sweet spot will come when it’s time to renegotiate the rent. With the tenants enjoying lower cost of outgoings it ought to place an interesting premium on the value of remaining in the building.
Next plan is to roll out the program to other buildings in his portfolio, Chua says.
“We have small city buildings. This is the first one to start with then we will roll this out to a few other properties.”
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