A new investment company that recently managed an environmental upgrade agreement for a building in Parramatta has launched a new business to offer similar expertise to other owners of B and C grade buildings.
Co-owners of the M20 building, Michael Peters and Dr Lionel Chang, along with a number of other investors, have set up Praxis Capital, which will specialise in project managing and securing financing for environmental upgrades for other poorly performing buildings.
Mr Peters said there was a sense among many owners that the legal framework of EUAs was complex and demanding, but as a former university law lecturer and qualified lawyer, he had the capacity to smooth the paper trail for owners.
“I don’t think builders are geared up for [EUAs] so we have packaged it up as an entire product – the builder, the legals, the financials and the engineering – and we can either sell the service or buy a percentage of the property and do the upgrade,” Mr Peters said.
The new outfit is also employing engineers with specific skills in energy efficiency auditing, mechanical and electrical systems, and building management in order to be able to provide a one-stop service for the entire EUA process including documentation, planning, and maintenance phase monitoring and management, including tenant mix if required.
Praxis Capital is in the process of securing a property outright that will prove the business model and be a further case study in addition to M20 to showcase the process for other building owners.
Praxis will approach owners to undertake upgrades on energy, water, fresh air and air quality, with the aim to deliver an uplift in value, improvement in NABERS rating, reduction in outgoings for energy, water and maintenance, and a higher quality indoor environment overall, Mr Peters said.
The plan is to carry out an initial audit of energy, water and the state of building systems as well as a property valuation and energy costings, then options will be outlined for improving the environmental performance, reducing outgoings and increasing capital value.
“We aim to get old buildings working like new buildings,” Mr Peters said.
“For example, with M20 the replacement cost of that building would be about $23 million to build a like-for-like building. Under the EUA, we put a few million in to get an equivalent building to a $23 million property.”
- See our story Parramatta’s M20 gets an EUA-driven upgrade
There is a broader environmental cost saved also, he said, in terms of the costs of demolition, waste and new resources.
“We’ve done the figures, and when council says someone should demolish and rebuild, the figures didn’t make sense. That’s because they do not factor in the other costs – there is a cost to pollute; there is a cost to waste.
“Water and air are finite commodities, and when a building performs well, it conserves them.”
For future projects, Mr Peters said Praxis would seek EUA financing on the behalf of owners and then fund the balance of works itself.
A share in the building
The model is a service model agreement, which includes a maintenance agreement. But if the owner does not want to take this on Praxis will buy a minority share in the building, and then if the upgrade results in increased value, the owner can buy the Praxis share out at a price that reflects the increase. If there is no increase Praxis can offer to buy the owner out – it in effect carries all the risk.
“The owners walk away with a profit either way,” Mr Peters said.
Because Praxis will bear any loss for an unsuccessful upgrade, an engineer will join the staff early next year to provide specific expertise in structural engineering and building infrastructure.
“The building has to have the right kind of skeleton for an upgrade,” Mr Peters said.
A new property trust and maybe green bonds
Mr Peters said the group is also in the process of creating a property trust that will be a vehicle for private investment in the retrofitted building class. In addition, the group will seek to secure registration for a financial securities division, with a view to issuing green bonds early next year.
“We looked around and there is no financial product where people can invest in buildings to fix them up and get a higher NABERS rating then harvest the extra dividend from the value uplift,” Mr Peters said.
Nice returns possible on older stock
He said the firm’s model of buying dilapidated building stock that could be improved is a more likely provider of returns than investing in a building that is already premium, where the capital uplift is slower to accrue.
Resi and retail could be in the mix
In addition to commercial office projects, it is also looking at the residential sector and retail centres, with a shopping centre in Sydney currently under consideration.
Mr Peters expects the bond will offer a 4.2 and 4.9 per cent interest rate. The firm will also develop a class of bond to enable even smaller investors to buy into buildings the firm is upgrading.
Banks are talking
Negotiations are currently underway with one of the major banks to develop a model to allow bond holders to use the bond as security against capital raising for other investments, and another avenue is being pursued to attract superannuation investment both for the short and long term in secured bonds.
Mr Peters said there had been a slow uptake of EUAs on the part of building owners because many were only concerned with the rent, not with the bigger picture that a more efficient building brings in better quality tenants and allows the owner to reduce ongoing costs on the books, as well as shrinking the carbon footprint of the property.