On why we need to talk about retail
13 February 2014 — This week the dam burst on some very interesting news on retail property. Some good, some bad.
The catalyst was, well, Catalyst Australia, a not for profit policy group that last week produced a report finding that the property industry was so-so in its sustainability performance, but that the retail property sector was woeful.
Because the retail sector is responsible for 4–5 per cent of carbon emissions, with shopping centres responsible for over half this figure, the findings were a big deal.
Near the bottom of the pile in the report was Westfield, the biggest retail landlord of them all.
Manager corporate affairs for Westfield Julia Clarke begged to differ on the findings of the report and told The Fifth Estate last week that the company was working on energy reduction and a number of other programs, listed below.
Then came the revelation that the new Feds had shelved the introduction of the mandatory disclosure of energy ratings for shopping centres (and other property including schools, hotels and hospitals), perhaps after umbrella lobby group for the retail property behemoths, the Shopping Centre Council of Australia, made a phone call or two.
SCCA deputy director Angus Nardi said that while his members will subscribe to the Carbon Disclosure Project and the Global Real Estate Sustainability Benchmark, or GRESB, there are only “pockets of tenant demand” to drive a green agenda.
So what’s the problem with mandatory disclosure? Mind you, this isn’t mandatory performance in energy efficiency that was being called for. Nor an order to cease and desist in energy waste and all other ecologically destructive behaviour. No, just disclosure, so that every grown up in the room could make up their own mind. Transparent capitalist economy disclosure, where the wheels of commerce are meant to spin faster and better when all the cards are on the table. Level playing fields and all that.
Next was the good news. The Brisbane-based National Retailers Association is rolling out a transformative program for their retailers to save energy and money.
- See our report National retailers joins the battle for energy efficiency
And even more good news came from the Green Building Council of Australia’s announcement that the partnership with Kathmandu to roll out green stores was just the tip of the iceberg. Next would be one of the big department stores, one of the two big supermarkets and perhaps even all of the big four banks.
All great news.
But all of this harks back to the big questions: how bad has retail property really been? Why is the industry reticent to adopt mandatory disclosure? And what are the chances for reform at levels below the leaders?
We asked Bruce Precious, GPT’s sustainability manager, what his take was. Precious is well known for his technically incisive and politically brave statements on any number of sustainability issues. He kindly suggested the “ideology” line might be to blame for the SCCA’s lobbying.
“I just don’t understand the line that some people will take,” Precious said. “You could speculate that some are anti any form of regulations and will fight this. They might argue there is a cost to bear and if tenants start asking they may not be able to demonstrate a benefit and it just becomes a burden to business.”
But he said the key to sustainability in the retail property space was creating “appropriate market drivers”.
“With NABERS [Energy ratings for offices], tenants started asking for better rated building and you just don’t get the same response from retail tenants.”
However, he said that despite this GPT and most of his peers in other leading retail property-owning landlords were indeed making significant advances on savings in energy, water and waste.
“In our retail, energy is down close to 30 per cent. For us all the measures we’ve been putting into office have been common to retail and we’ve certainly seen the dividend from that energy savings.”
And there really have been some standout green performers in the space – GPT’s Highpoint, Stockland’s Shellharbour and Gandel/Colonial First State’s Chadstone Shopping Centre, to name a few.
Precious said the Catalyst report on the sustainability performance of the property sector was “a bit harsh”. It seemed to rely too heavily on Westfield’s performance, which ranked near the bottom of the property companies, as evidence of overall sector performance, he said. (This was acknowledged in the report.)
- See our article Report: Australian property sector failing on sustainability
“In my experience all of the peer organisations are on a similar path – [Stockland] with retail, Colonial with their retail and we know that they’re all seeing the same dividends. They wouldn’t be in the top ranking of GRESB if they weren’t.”
He also believed that Westfield was doing work on energy though perhaps did not communicate it very broadly.
Manager corporate affairs for Westfield Julia Clarke said last week that the company was indeed working on energy reduction.
“As an owner of major public facilities we have identified electricity use and its associated environmental impact as one our most material issues to consider when it comes to sustainability,” she said.
The company had also climbed the ranks in the Carbon Disclosure Project, moving from 85th position to 63 in 2014, she said.
Clarke also pointed to Westfield Group’s annual sustainability report over the past three years, “addressing our material sustainability issues”.
She also said:
“As reported in our most recent sustainability report, during 2012, Westfield Group’s total greenhouse gas emissions emissions were 664,450 metric tonnes CO2-e, representing a five per cent decrease year on year. During 2011 there was a 1.4 per cent increase in absolute GHG emissions largely due to the addition of the 174,00 square metre Westfield Stratford City to the portfolio.”
However, Clarke said that while Stratford had contributed an increase in GHG, it was “one of the most sustainable malls in the UK and generates 75 per cent of its own energy needs”.
Another lukewarm performer in the Catalyst report, Charter Hall, pointed The Fifth Estate to its Corporate Responsibility and Sustainability Report 2013, which stated that while its retail energy efficiency had dropped six per cent, this was due to recent acquisitions.
“Over half of this change can be attributed to new shopping centres reported on for the first time in FY13,” the report stated. “A fairer reflection of our performance would exclude properties sold in prior years or purchased in the current year.
“By this measure our retail properties improved their energy efficiency by 2.4 per cent.”
Charter Hall was targeting a five per cent reduction in energy and water for 2014, the report stated.
The Shopping Centre Council of Australia
SCCA deputy director Angus Nardi said a constant driver for owners was reducing operating costs, particularly in relation to energy, water and waste.
“NABERS and Green Star are important platforms and drivers for our members, as are systems such as the CDP and GRESB,” he told The Fifth Estate. “While there are pockets of tenant demand, our members are not experiencing widespread demand particularly against fundamentals such as centre location/trade area, foot traffic, turnover, tenant mix and occupancy costs.
“For existing centres a key barrier is the well-documented split-incentive. Access to capital is another issue.”
Issues for sustainability in retail
An insights paper by AMP Capital, a SCCA member, written by property investment operations manager Claire Talbot, found that the investment impact of sustainability measures in retail was not as easily identifiable as it was in the office space.
“The sustainability drivers for other commercial property asset classes, such as government accommodation policies for office buildings, do not exist for shopping centres,” Ms Talbot said. “There is no widespread demand from retailers, particularly small operators, for sustainable premises.
“In terms of consumer sentiment, to date there has been no clear evidence that customers will choose their shopping location based on the centre’s ‘green’ credentials.”
She also noted that the measurement of retail property sustainability was also not as mature as in the office market, with Green Star and NABERS ratings for retail only recently formalised.
Ms Talbot said a key driver for landlords to pursue sustainability was “efficiencies and minimising occupancy costs for tenants, which translates directly into higher net operating income and investment performance for our clients”.
However, efficiency was impacted by the building’s usage, “and in the case of retail, the highly regulated landlord-tenant relationship under state and territory retail legislation which can impact the operating hours of the asset”.
Much of the sustainability burden also fell on the tenants, as retail landlords may not be in control of plant or equipment, depending on the lease structure.
“This is particularly the case with some major tenants, including supermarkets and department stores, which incorporate sustainability initiatives in store fit-outs,” Ms Talbot said. “As such, the operation and efficiency of these tenancies depend on the tenants’ own commitment to sustainability.”
The way forward
The Green Building Council of Australia’s proposed certification tool for retail fitouts, with one of the major retailers, one of the major supermarkets and, fingers crossed, all of the big four banks in support, may put pressure on shopping centres to up their game when it comes to base building energy and water efficiency.
By bypassing the owners and going straight to the tenants, the tool could create the revolution needed to force shopping centres into creating the base building needed to match retailers’ aspirations.
“The great opportunity is when the retailers and the retail property owners start playing together a bit more,” GBCA director, market development Trudy-Ann King told The Fifth Estate.
The other oft-repeated issue is to do with lack of capital. Angus Nardi thinks the Emissions Reduction Fund could help out here.
“We are actively engaged with Government programs such as the Emissions Reduction Fund,” Mr Nardi said.
“If the ERF is designed properly, and responds to the sector’s real issues and barriers – rather than theoretical abatement models – it could be a step-change opportunity for retail property and even bring forward whole portfolio upgrades. It’s worth aiming big.”