Sustainable building upgrades can provide a more comfortable, healthy and productive workplace for tenants. With around 81 per cent of all office buildings in Australia more than 10 years old, there are plenty of opportunities for upgrades; however, these are often obstructed by sometimes high up-front costs, and the fact that building owners cover this expenditure, while much of the benefit in terms of energy cost savings and improved working environment goes to the tenants.
Now there is an affordable way for building owners to undertake energy and environmental upgrades to their building without any upfront cost, and to share the costs with their tenants for a win-win outcome. Environmental upgrade finance is a new and growing form of finance for building upgrades that reduce operating costs and improve the value of commercial buildings, while at the same time improving waste, water or energy efficiency, or increasing renewable energy. Despite the potential of this type of finance to dramatically improve the attractiveness of sustainable upgrades, it is still not well understood in the property sector.
A new program to clearly and simply communicate the business case for environmental upgrade finance was launched last month. The program is a joint initiative
by ClimateWorks Australia and the Sustainable Melbourne Fund, and is funded by the federal Department of Industry. The program covers the finance mechanism known as environmental upgrade agreements (EUAs) in Victoria and New South Wales, and Building Upgrade Finance in South Australia.
Sustainable building upgrades benefit building owners and tenants, as well as service providers such as property and facilities managers.
Building owners can benefit from an environmental upgrade of their building by reducing operational costs, increasing the value of their assets, and avoiding a situation in which their buildings fall behind newer builds, which are competing for the same tenants. A better building can help to keep existing tenants happier by delivering energy savings and a more comfortable, healthy and productive working environment. At the same time, they can provide a competitive edge in attracting new tenants and higher rents in the future.
Service providers, such as property and facilities managers, can also benefit from upgraded buildings, which help to avoid costly and time-intensive equipment failures, and minimise client complaints related to faulty equipment or poor heating or cooling.
In many cases, environmental upgrade finance can be a more attractive option than a traditional loan as a means of achieving a sustainable building upgrade.
Environmental upgrade finance is a proven market mechanism that makes it easier for businesses to access finance for improvements to existing buildings. It is very well suited to smaller owners of middletier stock, who may have limited alternative options for accessing finance for building upgrades. It also presents a new option for large institutional and corporate property owners of premium-grade office stock, as well as being available for other building types, including retail sites and industrial warehouses.
Commercial building energy upgrades using environmental upgrade finance present a strong business case.
A major benefit is that no upfront capital or additional security is required, unlike applications for traditional finance. This allows building owners to use existing capital to meet other investment priorities, and to preserve future borrowing capacity.!
Under environmental upgrade finance, competitive interest rates are fixed for up to 20 years. This means that there is reduced refinancing risk, and it allows building owners to plan with more certainty. Traditional finance for commercial property generally requires refinancing every two to three years, and rates may go up.
The long-term nature of environmental upgrade finance also means that the energy savings from the building upgrade can meet most or all of the loan repayments, delivering immediate cash flow benefits to the owner. Traditional finance is generally only available for two to three years, which creates a barrier for building owners wanting to upgrade property assets but remain cash flow positive.
Finally, environmental upgrade finance provides a secure and transparent mechanism for building owners to share the costs and benefits of building upgrades with their existing tenants.
This enables a benefit for both parties. The building owner gets a better asset, improved cash flow and an improved working environment, which is more attractive to current and potential tenants. Existing tenants can enjoy a lower-cost, more comfortable, and healthier working environment without having to wait until the end of their lease, and without increased rents. Traditional finance has no safeguards for tenants, meaning that tenancy upgrades often are not discussed until the end of a tenant’s lease, and can come with increased rents.
A number of banks, including NAB and ANZ, currently offer environmental upgrade finance.
This kind of finance is similar to council rates; it is attached to the building with repayments collected by the local council for redistribution to the financier. This structure reduces the risks for banks, and allows them to offer more attractive finance terms.
ClimateWorks has analysed a number of business cases on existing buildings to show the benefits of environmental upgrade finance compared to a traditional loan.
For example, a business case to upgrade a corporate-owned building in King William Street, Adelaide, shows that using environmental upgrade finance would reduce the owner’s annual finance payments, compared to traditional debt, by more than 90 per cent – an annual saving of over $220,000. The existing tenant would benefit from energy cost savings of $6454 per year, while the upgrade would allow the building owner to reposition the asset and
make it more attractive to current and prospective tenants. At the same time, it would reduce greenhouse gas emissions by 381 tonnes of CO2, which is the equivalent of taking 88 cars off the road.
The mechanism could equally apply to light industrial sites. Using this type of finance, ClimateWorks and the Sustainable Melbourne Fund completed a business case for an environmental upgrade to Reoweld’s regional family-owned steel manufacturing warehouse in New South Wales. The study shows that the owner could get interest rates 1.5 percentage points lower, and 100 per cent of the total costs for the project, meaning that the upgrade could take place without the owner having to spend a cent. Reoweld’s manager, Michael McPherson, states: ‘Any costs outside normal operating costs are hard to justify. Zero capital investment is great’.
Our program aims to improve the property sector’s understanding of environmental upgrade finance through a new, interactive website, and a series of workshops.
The new website provides a simple ‘mortgage calculator’-style comparison that enables users to compare environmental upgrade finance to traditional finance.
The workshops will focus on improving the skills of trusted advisers and intermediaries for building owners, particularly industry associations, tenants, property and facilities managers, energy service providers, consultants and other professional service providers such as architects, engineers and accountants.