1 July 2011 – More than 250 influential property investors and advisors turned out to Tuesday morning’s breakfast presentation at The Establishment in Sydney to hear the PCA/IPD Australian Property Index focus in detail on why and how green buildings were outperforming their peers. Oh, and a bit about how the regular property market was faring as well.

Outperformance was in the order of 340 basis points, managing director of IPD in Australia and New Zealand Anthony De Francesco said. But first he outlined performance of the overall market.

Overall market growth was 10.4 per cent for the year ending March 2011 – made up of 7.5 per cent income returns and 2.7 per cent capital growth, an improvement of 0.7 per cent on the previous year but there were signs of a slow down ahead, Dr De Francesco said.

“While sectors all show improvement in returns they also show a slow down in pace of recovery,” he said.

“In the office property sector, employment growth has reached a peak and is now softening.

“If the lab market really is softening then that will translate to moderate returns for the office sector”.

There were also signs of moderated growth in retail sales and housing approvals which would impact on other sectors of the market.

The capitalisation rates had remained steady at 7.4 per cent over the past two years.

In “green” property the news was clear outperformance (See our previous reports on IPD)

Over the two years to March green – or NABERS and Green Star rated assets outperformed non rated assets with strongest results observed in a four star rated assets.

NABERS rated assets show higher rental income which outweighs increased operating expenses, translating into superior investment returns for NABERS rated assets,” IPD said In retail the profile shows growth in moving annual turnover, or MAT, slowing to 2.4 per cent. It was “the lowest number in MAT since the late 80s,” Dr De Francesco said.

“There is an element of consumers being concerned about the direction of interest rates; they’re saving, not spending, so the whole deleveraging is filtering through not just to commercial but to the consumer sector.”

The interpretation was that this was a fallout from the global financial crisis – a combination of the wealth and income dilution effect, he said.

Poor news in the housing sector would also have a multiplier effect into the rest of the economy.

Research manager, IPD Australia and New Zealand Peter McGuinness said the index now comprised 239 assets.

The outperformance was in the order of 340 basis points or bps, Mr McGuinness said.

Key findings from IPD included:

  • Green Star office design or office as built rated assets outperformed non rated assets over the two years to March 2011. Strongest returns observed were in the four star rated properties.
  • NABERS rated assets showed higher rental income which outweighed higher operating costs.
  • Lower cap rates for sustainably rated properties suggested “a lower level of risk associated with investment in high energy rated office buildings.”

A panel discussion after the presentation again focused on the greening of the investment property market. Panel members were Craig Roussac, general manager sustainability, safety and environment Investa Property Group, Matthew Clark, director water and energy programs NSW Office of Environment and Heritage, John Freedman head of real estate and contractors research UBS AG and Graham Pearson fund manager, Dexus Property Group.

Moderator was Adrian Harrington executive director, funds, Equity Real Estate Partners

Craig Roussac, left and Matthew Clark

Investa’s Craig Roussac said strong performance in energy was just one component of a well performing building and that if sustainability was going to appeal to tenants “it has to be more than how big your electricity bill is.”

He also noted that in achieving a highly performing building it was increasingly clear that building management – the “people” side of running a building – was more important than the amount of technology it had.

“We will see more focus on the facilities side – what tools are being provided to the building manager,” Mr Roussac said.

Graham Pearson

“It doesn’t mean we are putting a whole lot of capex [capital expenditure] into a building.

“It’s about trying to get highly competent people running your building and probably not trying to stretch them too far.

“We’re seeing a bit of substitution of opex (operational expenditure) for capex, otherwise it’s wholly unsurprising that green buildings are performing better when tenants have been demanding it.”

Matthew Clark, recently appointed as director of energy and water programs in the NSW Office of Environment and Heritage, which manages NABERS, said that the investment markets have been paramount in pushing the property industry into greener product.

“There are two real drivers – there is tenant driver, tenant demand for greener space – but the strongest driver has been for the owner to show to their investment markets that they are managing their buildings efficiently,” Mr Clark said.

With mandatory disclosure, a NABERS Energy rating for offices of 2000 square metres or more, Mr Clark said there had been a “significant uplift” in demand for NABERS ratings, with more than1000 ratings occurring in the last 12 months, double the previous rate.

Mr Clark also said rated buildings tended to show improved performance over time, by between half a star to a full star, on average.

In the next few years, he said, there would be effectively no unrated buildings.

He also noted that a big change in recent times was the high performance now being achieved by existing buildings including heritage buildings.

(See our recent interview with Matthew Clark.)

Graham Pearson fund manager Dexus Property Group said there was more interest from investors generally and pointed out that it was probably more environmentally friendly to upgrade a building rather than knock it down and start again.

His group was “happy to buy a two star” building if it could be economically upgraded.

“Wholesale investors at the end of the day focus on performance, and that’s a test of how we approach sustainability and environmental issues.”

At the same time, he said he had not come across anyone who said they would only invest in a five star building.

John Freedman

Mr Pearson responding to a question said that for many wholesale investors sustainable property was not top of mind.

The reason, he said was because at only 10 per cent or so of total investment allocation, property was a minor part of the overall strategy and green property, presumably, even less.

John Freedman said there was increased interest in green buildings from some of the larger investor groups who were increasing their focus on what real estate investment trusts were doing.

“The starting point” he said, “was that if the manager has no substantive sustainability policy ie, they’re just paying lip service to it, they will reflect this in the valuation.”

Mr Freedman said that in a straw poll he took in the lead up to the event he found that investors believed that asset manager with “no real integrated sustainability policy faced longer term risks to their valuation because over time their ability to attract tenants would be impacted”.

“On the sell side investors are starting to switch on and brokers follow their clients.”

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