Nathan Fabian

Denise McNabb

11 September 2012 – Favourites: Two new sustainable property funds will soon be launched in Australia and green bonds are on the way.  Low Carbon Australia’s Meg McDonald tips  governments  and local authorities will lead the charge in a green investment revolution. Denise McNabb reports. on McDonald, Nathan Fabian; Russell Investments, The Australian Venture Capital Association; Deloitte and more.

A decade ago investment in Australia’s green building sector barely rated a look-in from the country’s superannuation funds, venture capitalists, investment bankers and the private equity sector.

Aside from the fact that there was little to invest in, the size and scope of developments in existence were too small to meet the criteria in multi-million and billion dollar portfolios. Data was also scant on yields achievable, timeframes needed for respectable returns and sustainability was still a prickly word in many quarters.

Some forward thinking high net worth individuals and a handful of Australian superannuation funds, such as Vic Super, did take the plunge with niche and speculative investments of between $1 million and $10 million.

But Australia’s focus in this arena to date has largely been in big energy and infrastructure projects that have scale, such as wind-farms and co and tri-generation plants.

The Australian Venture Capital Association estimated that $25 million was invested in Australia in clean-tech venture companies last year – a miniscule sum compared to international figures.

Accounting giant Deloitte and the US-based CleanTech Group, for example, reported in April that $US1.9 billion was invested in green technology ventures in North America, Europe, China and India in the March quarter. This is up 29 per cent from the previous quarter and 83 per cent higher than the same period a year ago. China and Korea, in particular, are fuelling this sort of investment with wide-scale green stimulus packages.

US-based Pew Charitable Trusts forecast in March that global clean energy investment was expected to increase 25 per cent this year to $US 200 billion led by China, the UK, Germany and Spain.

Australia is now slowly starting to catch this green investment wave that has created a multi-trillion dollar industry in Europe and the United States.

Give it another five years and green building and clean-tech investments will be essential components of institutional portfolios, says Nathan Fabian, chief executive of the Australia-New Zealand Investor Group on Climate Change.

The catalyst will be saving energy and how to respond to policy change,” he says, citing the National Energy Saving Initiative.

“The key is to create investment vehicles that have the size and structure that will provide acceptable returns.

“Institutions expect certain hurdle rates,” he says.

“If they invest in technology, for instance, that is considered high risk /high volume.

“But if they look at a service company that can take benefits from a green fund, more investors will be attracted to it.

Fabian cites CBus Property, a wholly owned subsidiary of the construction, building, infrastructure and allied industries superannuation fund Cbus, as a prime example of a superannuation fund that is switched on to the future of green building investment.

It paid $210 million for a 30 per cent stake in 1 Bligh Street in Sydney’s CBD, in partnership with DEXUS Property Group. The six star Green Star Office Design high-rise building, the city’s first to attain this top rating, has just won a bevy of accolades among them the recent  Urban Development Institute of Australia NSW Bricks Awards in the design and innovation category.

The Australian Ethical Property Trust, launched in 2009, invests in energy efficient buildings with a minimum five star Green Star rating from the Green Building Council of Australia, as well as in medical and allied health facilities and social infrastructure.

It aims to deliver returns at 3 per cent above the annual Consumer Price Index over five-year time horizons for retail investors. Its flagship building, the five star Green Star building at 64 Allara Street in Canberra is its first asset.

New funds coming on line
Fabian says the finance industry is working with sustainability participants to create two new funds in the green building sphere that will meet the requirements to attract institutional and other investors.

These funds will be released to the market in the next six months but he is giving little away as they are still “work in progress”.

It is likely they will aggregate green building development with energy efficiency technology that goes into the buildings.

Indexes, such as Cleantech, aggregate a number of products in this sphere for trading in Australia though its performance is still patchy.

Meg McDonald at the Property Funds Association conference early 2012

Meg McDonald, chief executive of Low Carbon Australia, says carbon tax, soaring electricity prices, climate change initiated government legislation and the quest for environmental star ratings had greatly raised the level of awareness of green sector investment.

Fabian says Australian listed property companies were improving their capital stock and NABERS ratings were becoming a catalyst for seeking  quality investments.

Martin Lamb, Russell Investments’ director, Asia Pacific Real Estate, said in a recent report that he believed value retention, not carbon tax, would drive green building investment.

He said the general consensus of 20 or so brokers, property fund managers and super fund property investors he had spoken to, was that the carbon tax might actually prove to be a relative footnote to a much larger wave of change sweeping the Australian property industry – the focus on improving the green credentials of buildings.

Sam Porath, also at Russell Investments, says in a section on green buildings in his March 2012 report “Global Cleantech: Quantifying its place in your portfolio” that the growth in the construction of green buildings, based on energy efficiency was resulting in developers and builders moving towards using more cost-effective efficiency techniques.

He said the marketing advantages of highly-rated green buildings had been empirically demonstrated and that landlords were investing in green building technology, “primarily as a way to ensure the relevance of their buildings in the future.”

The US-based McGraw Hill Construction Report says building green increases a property’s values by 7.5 per cent and improves the return on investment by 6.6 per cent.

The popularity of green bonds such as the qualified green building and the sustainable design project bonds in the US have yet to take off in Australia, but Fabian, like McDonald, says a lot of work is being done to develop an Australian green bond model.

McDonald said major institutional investors were looking for a bond-like structure that would have a large aggregation of investments so that they could be securitised (the practice of pooling various types of contractual debt and selling that debt as bonds to various investors. Principal and interest on the debt underlying the security, is paid to investors at regular intervals.)

Such bonds raise money to support environmentally sensitive projects such as building redevelopment and are made attractive to investors by exempting tax on interest earned on them.

The World Bank’s green bonds, for instance, invest in climate solutions through a fixed income investment product, aimed at stimulating and coordinating public and private sector activity to counter climate change. Since its first bond issue 2008, the World Bank has issued more than $US3 billion in green bonds.

Fabian says the quest in Australian is to sell such green bonds on the back of energy service agreements.

Meg McDonald says a bunch of new investors were investing in technology that drove efficiencies, not just with lighting, airconditioning, freezers and refrigeration.

She says one of the main barriers to uptake is the lack of critical mass.

“With energy efficiency there is a range of investments, no one big thing.

“The approach is buckshot, rather than a silver bullet.”

She says another issue was that superannuation funds were not highly active, with their focus tending to be at the consumption end.

She said private equity funds still needed convincing about investing in the green building and clean-tech sector because their mandate was to find a growth business to invest in that had an underlying business model that would provide that growth opportunity.

She said a lot of the drive for sustainability was being driven by legislation, grants and incentives and by demand for these services at the local council and state and federal government levels.

“Not only is this encouraging service providers but public financing of the sector draws private finance,” she says.

McDonald envisaged government and local authorities leading the charge in the green building investment sphere.

“Retrofits done through the councils would be an ideal asset for securitisation” she said.

“There also needs to be a willingness of companies to have a mandate on green investment, in their portfolios.”