L to R- Chris Slack, Meg McDonald, Niall McCarthy, after their presentations

11 May 2012 – Low Carbon Australia Ltd chief executive Meg McDonald told the Property Funds Association annual conference at Sanctuary Cove on the Gold Coast last week that the multiple pressures facing owners of property right now made this an ideal time to consider sustainable retrofits that would help the bottom line.

In a presentation that also included views from Eureka Funds Management Niall McCarthy and Harvest Property’s Chris Slack, McDonald said LCAL had been established to help overcome traditional finance barriers to achieving better performing buildings. This included the issue of split incentive, where the owner is reluctant to pay for upgrades that primarily benefit the tenants, such as energy efficiency upgrades.

Implicit in the LCAL offerings were financial instruments which could deliver financial products that could be essentially funded by the energy savings that the project could generate.

“We strive to create financial structures so that repayments are either equal to or less than the savings made through installing energy efficiency solutions,” McDonald said.

David Cooper, Castle Partners

There was now a range of financial instruments such as environmental upgrade agreements,  (EUAs) which tie repayments to a levy on local council rates, and leasing packages available.

Key players such as Origin Energy, NAB, Macquarie, Alleasing and FlexiGroup had partnered with LCAL to deliver these projects such as energy efficient lighting, building management systems, energy efficient airconditioning, cogeneration and trigeneration plants.

But LCAL could also point property owners to the technical engineering solutions that would work.

“It’s not finance alone, which is the issue, but it’s the whole package of the engineering and the guarantee of the energy savings. Also the information around energy savings –  to make sure those savings are maintained.

“One of the things we’ve tried to do is in fact be a source of expertise, not just around the finance but around the equipment and assessment of the energy efficiency gains that will be achieved.”

Rising energy prices and the coming carbon price made this an ideal time for property to “get ahead of the game” and invest in greater energy efficiency, McDonald said.

“While businesses are focused on the impending introduction of carbon pricing, they haven’t lost sight of the fact that we are already in an era of rising energy prices that are increasing building operating costs, which ultimately can lead to an impact on valuation prices.” .

By 2015 energy prices will double, she said.

Another major driver was the evolving regulatory regime, McDonald said.

“The NABERS regime is being developed regardless of the carbon price. We also need to introduce a national energy savings initiative. Property owners should be looking at a rolling program of regulation for the sector.”

Foreground, Frank Zahra, Australian Unity

McDonald said the point of LCAL, a company established with $100 million of funding by the federal government, was “actively demonstrating that there are ways of overcoming traditional financing issues – such as the requirement for up front capital and the impact of funding on cash flow.”

Niall McCarthy, executive director of Eureka Funds Management, a wholesale fund manager that was also involved in some low carbon financing, said real estate’s contribution of 23 per cent of greenhouse gases made property a key target of emissions reductions strategies by governments.

There was also a strong momentum from the largest institutional investors and leading corporates domestically and globally to shift the way business is conducted to a more sustainable footing.

Mandatory disclosure of energy performance in Australian offices and a continually increasing demand for information from fund managers were among key indirect drivers to greater sustainability, he said.

Fund managers, for instance were “continuously asking for more detail of what we are investing in.” This included energy performance, the nature of the investment, the future proofing so that the asset would not be stranded. “There were more investors surveys and more and more scrutiny of us.”

Large global investor disclosure surveys of pension funds were drilling down into detailed scrutiny of ratings, the nature and capital intensity of assets.

And there were opportunities that could hopefully be tapped into the part of the $10 billion Clean Energy Finance package that is mooted to be available for energy efficiency programs.

But a significant shift in thinking and experience of energy efficiency retrofits in the short term was slow going.

Holding back any  “vast flow of funds” in to the sector were current global and domestic uncertainties, rapid expansion of fossil fuel mining, which was undermining investment in renewables and cost of living backlash politically.

There was also a shortage of capital and the failure of property owners to see energy efficiency as a priority.

The $23 on carbon price from 1 July was “not a big deal for real estate” and was unlikely to significantly change behaviour, he said.

Adam Murchie, Forza Capital

There were not just capital shortages, he said, there were non price market barriers such as information gaps and lack of experience that could be easily tapped.

“It’s often quite a complex space and requires investment of management and time,” McCarthy said.

Projects were available to demonstrate the profitability but these were generally too small to support the significant investment of management time required to achieve momentum.

EUAs, which allow repayments to be placed as a charge on local council rates, have been introduced in Melbourne and NSW and these could be shown to break the split incentives. These, however, were still at the early stages and needed to overcome barriers such as the bureaucratic hurdles required by local government administrators to engage in the schemes.

Because these instruments were so new, there was a need to “learn by doing”.

Another barrier to change was that the impending carbon price was not considered a big factor for property since it impact was considered to be small, at about 1.7 per cent increase in overall cost of construction.

Chris Slack discussed details of his Harvest Property’s recently announced energy upgrade project and subsequent sale in Brisbane.