By Luke Nixon, CB Richard Ellis

6 October 2011 ­– A new report produces more evidence that rated NABERS buildings outperform non rated ones. Early signs indicate that green development in Sydney’s CBD is gaining momentum to help redress an apparent shortage of space with a NABERS energy rating above four stars.

The trend towards green office buildings is expected to continue, however it will be dependent on owners and developers continuing to see an increase in occupancy levels, higher returns on investment and a decrease in risk relative to poorly rated buildings. Following is an extract from this report.

There are differences between NABERS and Green Star ratings. NABERS ratings are focused on the actual building operation and benchmarking building performance.

Green Star ratings (managed by the Green Building Council of Australia) however, focus more on the design or physical aspects of the buildings. As a result, most new buildings are being designed to a certain Green Star standard and additionally targeting a NABERS rating above four stars on completion.

As at July 15, 2011 www.nabers.com.au listed 91 properties in the Sydney CBD with a current base building NABERS energy rating. This represented 2.247 million square metres of office space, around 46 per cent of the available net lettable  area of the Sydney  CBD, according to the Property Council of Australia’s most recent survey in July 2011.

This is a net increase of 93,000 sq m from the amount of energy rated NLA recorded in January 2011.

The website lists an additional six buildings, however, it is important to note that more buildings were awarded a NABERS rating during this period, but that a number of ratings have either expired or been removed from the website.

It is not compulsory for owners to have their ratings listed on the website and most likely that these properties have obtained low star ratings.

Demand

Over the first six months of 2011, the Sydney CBD vacancy rate increased from 8.3 per cent to 9.3 per cent according to the PCA.

Over the same period, CBRE estimates that vacancy in NABERS rated buildings increased from 5.1 per cent to 5.3 per cent.

Breaking these results down further, buildings with a NABERS rating of four stars or above saw vacancy at just 3.6 per cent in July 2011, which equates to about 36,000 sq m of space. This is significantly below both the CBD total vacancy rate (9.3 per cent) and the prime vacancy rate (7.8 per cent).

Development activity

Green buildings appear to represent the new best practice for developers. The PCA  already mentions green ratings in their guide to office building quality which is used to determine building grades and the recent carbon tax announcement is likely to make these buildings more  cost  effective.

Current development trends suggest that NABERS rated supply levels will increase quickly once new buildings reach the end of their exemption periods. (New developments are exempted from obtaining a NABERS rating for the first two years from completion while the buildings reach normal operating and occupancy levels).

The majority of recent developments in the Sydney CBD have achieved a Green Star rating of five stars or above for office design and are targeting a NABERS energy rating of at least four stars.

Assuming that the majority of new  stock will obtain a NABERS rating in the short term, analysing the targeted NABERS ratings of developments completing between 2010 and 2013 can give further insight into the likely direction of the vacancy rate for rated properties.

All major new builds and refurbishments due to complete in this period are targeting a rating of 4.5 stars or above.

These developments alone will increase the amount of stock rated with a NABERS rating of four stars and above by around one third.

As at September 2011, over 70 per cent of this space had been leased. While this amount of stock is significant, it is all expected to be of a grade A standard and office demand is also expected to strengthen during this period.

As such, much of this space is expected to be absorbed by the time these new buildings are awarded a NABERS rating.

Government plans and policies

In 2006, the federal government released its policy on energy efficiency in government operations which outlined its commitment to sustainable buildings.

The main guideline in the policy in relation to property is the requirement for federal government departments which are either leasing new premises or undertaking a significant refurbishment to choose buildings that achieve or are designed to achieve a minimum of 4.5 star NABERS rating.

This has had a pronounced effect on the Canberra office market in particular where the majority of tenants are federal government departments, and buildings that do not meet these requirements are no longer being considered by government tenants.

The diversified tenant base in the Sydney CBD will mean the effects of this policy are less evident than in markets like Canberra.

The NSW Government has implemented a similar policy. It has also legislated for the provision of environmental upgrade agreements.

This scheme permits new funding and repayment arrangements for building owners, seeking to address the “split incentive” issue – where tenants are able to realise the benefits (through reduced outgoings) of the building owner’s capital investment in energy and  water efficiency projects. These were initiated through the City of Melbourne (Sustainable Melbourne Fund) and are now available in some NSW council areas. Some local governments are also offering floor space incentives for green development.

NABERS energy with Greenpower

The NABERS system allows building owners to give their rating a boost by purchasing Greenpower (electricity from renewable sources).

Theoretically, this can  allow  low  rated  buildings  to  purchase  enough renewable power to achieve up to five stars.

When Greenpower is taken into account, the average base building NABERS Energy rating in the Sydney CBD increases from 3.3 stars to 3.5 stars.

Owners must advertise the star rating without Greenpower as part of the commercial building disclosure scheme  as  the  aim  of  the  scheme is to focus on the energy efficiency of the building.

They may also elect to show the rating with Greenpower, however this is not mandatory. Evidence over the first half of the year suggests that fewer owners are choosing to purchase Greenpower to improve NABERS ratings, instead opting for operational improvements.

Other NABERS ratings

There were 38 NABERS energy ratings current for individual tenancies (as opposed to building ratings) as at July 2011, with an average of 3.8 stars per tenancy.

This average is most likely higher than other star ratings due to the lack of mandatory disclosure criteria, meaning only tenants who have invested in efficiency are likely to have had their premises rated.

The average NABERS Energy rating for tenancies in Sydney CBD has, however, decreased during the first half of 2011. Tenants from property services and public administration industries were most likely to have their tenancies rated and around a quarter of the tenancies rated in July 2011 had achieved a five star NABERS Energy rating.

In addition to the widely used base building energy rating, 72 buildings in the CBD have received a base building NABERS. With water rating at an average of 3.1 stars. NABERS ratings for indoor environment and waste are far less common in Sydney at present.

Conclusion

As environmental sustainability tools become more widely used and accepted by stakeholders in the property market, it is likely that clearer trends will become apparent with regards to tenant demand for buildings that perform strongly in terms of NABERS ratings.

In fact it is already implied that all new builds and major refurbishments will obtain Green Star and targeted NABERS ratings. It is also expected that an increasing number of buildings will have their energy efficiency ratings going forward.

Early signs indicate that “green” development in Sydney CBD is gaining momentum to help redress an apparent shortage of space with a NABERS energy rating above four stars.

The trend towards green office buildings is expected to continue, however it will be dependent on owners and developers continuing to see an increase in occupancy levels, higher returns on investment and a decrease in risk relative to poorly rated buildings.

Luke Nixon is a senior manager with CB Richard Ellis Pty Ltd, Global Research and Consulting, Australia