1 July 2014 — Behind one of the most stunning profits in property investment in recent years – $10 million in only six months – is the story of a cool analytical lens applied to the search for investments with positive social and environmental impacts.
Even more impressive than the profit is that the buyer, Australian Unity Diversified Property Fund, is delighted with its purchase, having scoured the market for a year to find such a high quality building that meets its sustainability credentials.
The building, occupied by the Environment Protection Authority and the University of Melbourne’s Trinity College, is at 200 Victoria Street in Carlton on the fringe of the Melbourne CBD. Nearby is Pixel, the 6 Star Green Star “laboratory” developed by Grocon, which also may have achieved a premium sale price for its greenness. Or not, depending on who you listen to.
The recent sale however leaves no doubt.
Buyer of the property in December, Impact Investment Group, knew exactly what it was doing.
Here was a building refurbished in 2009 by The Drapac Group, well known for its high quality sustainable refurbishment work, part occupied by the Environment Protection Authority and, at the time, 30 per cent vacant.
Its green credentials were among the best in the country: 6 Star Green Star office design and As Built, a five star NABERS energy rating and it included a trigeneration plant.
But the regular market was dazed by the vacancy figure instead of dazzled by its quality.
Impact Investment picked up the property for $33.55 million.
Also in the market for a good sustainable rental property at the time, was Trinity College. The college’s chief financial officer, Gary Norman, also happened to be the person in charge of the college’s sustainability strategy, so you can imagine there was little friction between the ethical, social and financial outcomes he was after.
The EPA building was a perfect match for his needs, finding a home in Carlton for the college’s Pathways School.
This is what he said: “In addition to delivering state of the art facilities to our international students, our presence in the EPA Building supports our sustainability strategy. We look forward to sharing the building with our co-tenant the EPA.”
The valuation of the building shot to $37.3 million.
On Tuesday, Impact announced it had sold the property to Australian Unity for $42.3 million.
That’s nearly $10 million up on the purchase price and $5 million above the valuation, carried out in March.
So what’s the thinking here and what’s going on in the green investment market?
First, what the conventional market failed to grasp is the level of appetite from tenants and investors alike for a good quality, sustainable building on the edge of the CBD.
Second is that Impact Investment is no ordinary property fund.
It’s owned by chief executive Chris Lock and the Small Giants group, which represent the family office of Daniel Almagor and Berry Liberman. Small Giants is responsible for the The Commons apartment development in Brunswick in the inner north of Melbourne, well known for its sustainability features including absence of airconditioning, no car parking and bees on the roof.
Impact has been established specifically to source investments with positive social and environmental impacts. The EPA building looked like a good opportunity.
In a conversation with The Fifth Estate on Tuesday afternoon, Lock was reluctant to be too forthcoming about his coup.
But he admitted that it was a closer understanding about the appetite for green properties from both investors and tenants that allowed him to appreciate the potential of the deal.
The value of green and how it differs to regular “quality” is not easy to quantify, he says.
“It’s hard to put a figure on the value of the sustainability qualities of the building,” he says.
But it’s the aim of the fund to seek out that additional quality and value.
“In the long term we believe we can achieve much higher returns on environmental credentials but we never anticipated it would be over such a short period of time.”
A window in the market cycle helped.
“We bought it at a very good time when buildings with any vacancy risk were being punished, maybe less so in the CBD, but this is on the fringe.”
The real coup though was tying up a long-term lease to Trinity College, which meant the building suddenly had two premium tenants, the University of Melbourne and the Environment Protection Authority.
“It was always going to add some value having blue chip tenants but overall it was a combination of good timing and the market that has recently tightened since that point of time.”
The other opportunity was understanding the attraction of the rental structure and how that would appeal to the right tenant who needed absolutely to find a sustainable home.
Rental for a similar building in the CBD, “a market rate for economic costs”, would be around $450-$500 a square metre, compared to $350 a sq m for the EPA building.
In the end, he says, there was “no other building like it in this location, which attracted the college to it, and only a small number of buildings in the country that meet these credentials in this rental bracket”.
Did Impact sense an opportunity that slipped others by?
Yes. It was “under our noses”, he says.
The difference with other investors, Lock says, is perhaps a question of timing more than anything else.
“Everyone is looking for very strong short term returns, which is not our approach. We’re looking for the long term.”
The company also sourced a number of reports from analysts such as IPD in Australia and others overseas that show greener buildings have high rental returns, lower vacancies and higher capital returns than other buildings.
Lock founded Impact about 18 months ago after a background in property syndicates and transactions in particular with “family office” investment trusts that represent a number of families.
He has about 100 investors, sourced mostly through word of mouth.
“The majority of investments are between $100,000 and $2 million, so it’s quite diverse,” he says. Typically they’re professional and small business owners or self-managed super funds.”
Lock says not all want sustainable outcomes. There are generally three types of investors: one that is interested in “ethical or impactful” investments; one that is “there only for the commercial return who don’t care if the investment has social or environmental outcomes – and that’s still the majority, though I think that’s changing; and a third who think investing with a social and environmental lens will bring better returns”.
Driving the impact investment, he says, is a “generational shift”.
“There is definitely a common theme in this, a generation who are moving towards control of their inheritance and want it to be sustainable.”
Australian Unity finds a building that ticks the right boxes
For Australian Unity the building was a perfect fit into a portfolio that AU likes to keep as sustainable as possible.
Head of property fund, retail at Australian Unity Real Estate Investments Mark Lumby points out that the asset meets many other criteria.
It would “enhance the DPF’s geographic, sector and tenant diversification as well as the earnings and distribution return for investors by providing stable, secure long term cash flow – enhanced by fixed annual rental increases through high quality caliber tenants”, he said in a media release.
Property Portfolio Manager at Australian Unity, Nikki Panagopoulos, told The Fifth Estate that the purchase was the culmination of a year long search for the sustainability minded fun and will take the average NABERS ratings of the portfolio above 4.5 stars and closer to five stars.
“We looked for something that has a stable income return and we were really trying to find an asset that is sustainable and looks to the next generation of offices to ensure we are able to continue to maintain high calibre tenants.
“When we reviewed this asset it met all our strategic objectives for a diversified property with core tenants with a long weighted average lease expiry and stable returns. It ticked all the boxes.
“It’s just a great asset with great ESD features. You don’t get many reconfigured assets with co-generation. It will go a long way into the new generation of offices and that’s what we loved about it.
“It’s 6 Star, it’s got a really clever refurb and it accommodates co-generation.”
The purchase takes the portfolio to around $240 million in value including three office buildings in Parramatta, one of which, at 10 Valentine Street, featured as a recipient of an environmental upgrade agreement.