25 March 2013 – A TFE Special Report: We hear a lot about how Australian property companies are world leaders in creating energy-efficient buildings. And there are some very impressive green buildings and plenty of data to back this up. Pity about the enormous elephant in the room, then – high tenant energy use and poor tenant/owner relationships.
Corporate and government tenants are pushing for greener buildings but are they following through with their own fitouts and energy consumption? No, say energy efficiency experts and property agents and it’s time for this to change.
The change could come from an unexpected quarter. At Green Cities last week Daniel Grollo, chief executive of Grocon, made the bold prediction that in the future building owners are likely to take responsibility for a building’s entire fitout, including tenant space.
“This would remove the need for “make-good’ clauses in leases that require tenants to pull everything out at the end of their tenancy, thus slashing the massive waste this creates. It could also mean huge cuts in energy use.
“We’re starting to see the beginnings of developers having to warrant some aspects of green buildings and at times that comes down to a per person basis. I also think we might start to see down the track rentalisation of the entire fitout process, so tenants rent the entire fitout from the landlord rather than developing their own fitout.
“We do this in our hotels and the same process can be moved to commercial offices. There’s a lot of inefficiency in building a base building and then retrofitting the tenant fitout,” Grollo said.
Such thinking could also remove in one fell swoop decades of tenant/owner mistrust over who is responsible for what.
And it can’t come soon enough for many. According to energy efficiency experts and leading property consultants who spoke to The Fifth Estate, changing tenant attitudes to energy use and improving communication with landlords is the next frontier of energy efficiency.
Where’s the government leadership?
Gavin Gilchrist, managing director Big Switch Projects, said he found it “incredibly disturbing” that so few corporate and government tenants have NABERS tenancy ratings displayed on the NABERS website.
“It is possible they have had NABERS ratings done and not recorded them but that begs the question of why not. Displaying a rating means accepting a high degree of accountability for carbon emissions and energy use.
“You can’t today have a credible energy and carbon policy without reporting your results. There is a government endorsed, independently verified rating system which government tenants are ignoring,” Gilchrist says.
To date only two of the big four banks have reported a NABERS tenancy rating according to Gilchrist – Westpac for four of its tenancies and NAB for two – and just one of the large accountancy firms – Ernst & Young with two tenancy ratings of 4.5. None of the major telecommunications companies has listed a rating.
Federal government tenants have a particularly poor ratings record, says Gilchrist. He cites the low number of NABERS tenancy listings for Canberra postcodes where there is a predominance of government tenants.
In areas with postcode 2600 just one service provider to government, UGL, has a tenancy rating listed; in postcode 2601 five federal government departments have tenancy ratings, but 40 base building in the same postcode are NABERS-rated; in Belconnen (postcode 2616) not one government agency has listed a rating and in Phillip (2606) just one, the Department of Families, Housing, Community Services and Indigenous Affairs, with a tenancy rating of 5.5.
“Government departments and agencies have superbly pinned down their landlords to rate their buildings but almost none have rated their own offices to let us see what they’ve actually done themselves to manage their energy,” says Gilchrist. “And since there are so few tenancy ratings, one can only assume they’ve not done much at all.”
Time for mandatory disclosure of tenancies? Absolutely
So what is the way forward? Gilchrist favours legislation similar to the mandatory disclosure of energy efficiency for building owners.
“If I had my way it would be mandatory to display a NABERS tenancy rating for every office over 2000 square metres,” he says. “We need to move the large ones first to bring the rest of the market with them.
If I had my way it would be mandatory to display a
NABERS tenancy rating for
over 2000 square metres – Gavin Gilchrist
“Every company should be putting their tenancy rating on their website. Right now so few have actually done a rating or are prepared to disclose what the results are. You only have to look at the skyline at night in any Australian city to see that tenants are not even turning their lights off. That’s how far they are from even thinking about energy use.”
Gilchrist believes the energy use split between tenants and owners has shifted significantly over the past 10 years. Where it used to be around 50/50, the huge drive by building owners to reduce energy use in their base buildings over the past decade means the ratio of tenant to owner energy use is now more likely to be 60/40.
He says a recent increase in electricity prices of around 20 per cent has done nothing to shift tenant attitudes.
“Electricity use and the resulting carbon emissions is just not something most tenants think about at all. The accountant pays the energy bill and while there could be a sustainability manager who cares about these things, they don’t communicate with each other,” says Gilchrist.
Yet upgrades to reduce energy use are not hugely expensive compared to other expenses such as IT upgrades or marketing campaigns. It is one of the cheapest capital expenditure items with one of the highest rates of return, says Gilchrist.
“The real challenge for policy makers and every Australian company and government agency is to attend to this. That single act of legislating mandatory disclosure of energy efficiency by tenants would cost the government nothing and would very quickly transform the market.”
Poor tenant/landlord relations hampering takeup of EUAs
The poor tenant landlord relationship in Australia is a key factor in tenant energy use and could be behind the slow takeup of the new financial product, Environmental Upgrade Agreement or EUAs, which requires interaction between landlords and tenants.
Barriers between landlords and tenants in Australia are historical, says John Preece, national director Frank Knight. He believes we have a long way to go in fixing the relationship and believes it is instructive to compare the UK experience with Australia’s.
“The UK is a great comparison,” he says. “There I’d be free to act as a tenant rep in the morning and a landlord rep in the afternoon. Here it’s very different – it is very combative and advisers are separate on both sides and never the twain shall meet.
“There’s a fair amount of scepticism about things that are being offered by the landlord,” says Preece.
A key example of this is EUAs, by which landlords can access low interest loans for environmental upgrades and then pass costs on to tenants with the proviso that tenants will recoup the cost in energy savings. The product is an innovative way of removing the split incentive, whereby the owner pays for upgrades but doesn’t benefit from the energy savings.
Unfortunately, there is anecdotal evidence that some landlords will focus on it as a way of getting tenants to pay for their capital expenditure rather than seeing the bigger sustainability picture, says Preece. Because the loans are repaid through council rates, they see it as a way of charging it back through outgoings. Tenants then get their backs up and are determined not to pay for the landlord’s capex [capital expenditure].
“It’s a perception thing,” says Preece. “Even though tenants are protected by legislation they don’t want to do something that benefits the landlord. It’s also the way they’re advised. One or two tenant reps are already building in clauses that say the landlord can’t use an EUA to pay capex by putting it in outgoings.”
And while a large number of landlords have NABERS ratings of at least 4.5 on their buildings, it’s a very different story when it comes to tenant fitout.
“Many large tenants are prepared to do the right thing provided it doesn’t cost them too much. It’s not true of all corporate tenants but you do see government departments that work around it. They want green buildings but when the shoe’s on the other foot they don’t want to know,” says Preece.
Peter Messenger, CBRE’s senior managing director global corporate services Australia & New Zealand, says most tenants are happy to go along with building upgrades as long as it doesn’t “unduly interrupt their quiet enjoyment of the building.”
As far as communication between landlord and tenant goes, things may not be perfect but they are a vast improvement on the days when landlords were the masters and it was either ‘my way or the highway’”, Messenger says.
Relations are better than the days when
“my way or the highway”
He points to Goodman as an outstanding landlord in the industrial sector because of its collaborative approach. It is where owners are not in it for the long term that relationships with tenants can suffer. This can be true of large property funds that are focused on short-term profit and are “still in the Dark Ages in regard to tenants.”
The market, says Messenger, is on the point of the next phase of upgrades but private owners of the mid range and lower end properties will be hard to convince.
“The biggest thing going forward is that professional landlords will upgrade and the second tier of private wealth won’t unless it’s legislated or vacancy becomes so apparent they have to,” he contends. “Tenants in these buildings don’t ask for upgrades.”
But it is the strata title sector where Messenger wants to see change and this is one area not yet embraced under EUA legislation.
“Strata buildings are the biggest blight on the development landscape, particularly in Sydney. They were poorly built in the 60s and 70s, have no architectural merit and half are falling down because the owners are too tight fisted to do anything,” says Messenger.
Making those buildings energy efficient through tenant owner collaboration is a challenge of mammoth proportions.
A UK case study – how British Land engaged tenants
British Land, the UK’s second largest real estate investment trust and recent winner of the UK Low Carbon Champions Award, engaged tenants in its energy efficiency drive in the belief that this was the key to reaching its ambitious energy and carbon emissions reduction targets. And the results are impressive.
In the three years since it began the program British Land has exceeded its energy targets, achieving 27 per cent like-for-like energy reduction across its portfolio, which equates to 24,500 tonnes of carbon saved or £3.3 million costs saved for occupiers.
The UK government has introduced legislation that requires all buildings to have an energy rating of F (equivalent to approximately 2.5 NABERS energy rating) by 2018 or be made obsolete. Currently around 18 per cent of commercial buildings in the UK have an F rating. This provides an incentive for owners to upgrade.
But British Land believed tenancy engagement was the key to driving real change.
The REIT invested in reducing energy consumption in its tenancy space and put considerable effort into communicating the benefits to tenants. In turn tenants helped pay for improvements to base buildings.
BL did this by convincing 21 tenants across its portfolio to sign up to their tenancy energy usage reporting program, which gives live energy usage data as well as shows how they are performing against targets. This enables BL to quickly identify saving opportunities and to engage tenants on getting buy-in to implement them. It also gives greater transparency on the outcome of their actions.
BL used another program to highlight base building saving opportunities on an ongoing basis, which helped show occupiers that they are delivering what they promised – to keep service charges low.
With electricity accounting for 15-25 per cent of service charges and rising, getting this message across to tenants is crucial.
Keith Gunaratne, chief executive of Australian energy efficiency consultancy EP&T Global, which worked with British Land on its upgrades, believes the benefits for owners of taking occupiers along on the journey can be enormous.
An example of the collaborative effort was that BL’s building management got agreement from occupiers to change operational hours of their chillers from 5am to 7pm to 7am to 8pm, saving 200 kW hours a week and £38,000 a year for tenants.
“Clearly, a decision of this nature was a significant change in operating procedures in the building. By providing evidence of this nature to occupiers, it helps to build trust between all stakeholders and builds confidence for further initiatives,” says Gunaratne.
Part of the problem in Australia he believes is the results-oriented nature of the culture. If it is too hard to get the desired a result people walk away and concentrate on something where they can get results more quickly.
“Major property owners have got a lot of traction where they have focussed on what they can achieve easily. Now they have to work harder on tenant engagement. That is the other half of a building’s energy use,” says Gunaratne.
“When owners do a project they must show tenants the benefits on a continuous basis. In Australia building owners market their achievements very well to the press and the public but not to occupiers. This has to change.”