[+] Go Green or Go Broke: Case for Zero Carbon Grows

“It’s not spending $5 million to make $5 million—it’s if you don’t spend $5 million, it will be worth $20 million less.” Paloma Property director Hamish de Crespigny isn’t pulling any punches. The developer was answering a question from the floor at the City of Melbourne’s panel discussion on zero carbon retrofitting. It was the question on many developers’ minds: why should I retrofit and what will be the return on my investment? De Crespigny’s answer was echoed by the rest of the panel—if you don’t do it, you will devalue your asset. The market for zero carbon buildings Melbourne’s CBD is full of buildings, many old, many heritage-listed and much like Sydney, little open space for new developments unless you get permission to demolish. In fact, it has 1200 buildings that need retrofitting. And the makeup of the city is changing too. Post-Covid, many more people are returning to the city to live but only very gradually to work. It’s left many investors wondering what to do with properties that are not necessarily attracting their usual market of tenants or how to futureproof themselves especially when construction and material costs have increased dramatically. And with the changing times has come a change in attitudes around what it means to live, work and play in the built environment, and how that built environment and your life affects the world around you. JLL capital markets ESG head Caitlin Uren says those attitude shifts around sustainability and climate change haven’t occurred in just the general public, it’s across investors, landlords, tenants, governments and companies. The company surveyed 450 clients with 72 per cent of investors keen on sustainability in their assets. “The investors, particularly in the institutional space, have really been driving the focus on sustainable real estate for some time,” Uren says. “This ties back to their own corporate commitments but also that they see this type of property as being high performing and low risk.” ▲ The GPT Group announced in 2018 that it would aim to achieve net zero carbon emissions across its entire office portfolio including the 8 Exhibition Street property in Melbourne. Occupiers are also keen on zero carbon buildings with 40 per cent of occupiers surveyed already committed to net zero carbon and 80 per cent aiming to incorporate it in their corporate strategies by 2025. Around 70 per cent would pay a premium to occupy such a building with data showing a clear divergence in rental prices from March 2021, post-Covid and post-COP21 with a massive increase for sustainable buildings. “So firstly, there's obviously this war for talent and wanting to attract the best people to work for your business and the suitability commitments of your organisation where employers are factoring in where they decide to work,” Uren says. “But equally in a post-Covid environment, we see that you have to provide that social value at your headquarters, your offices, and really compete with the commuters. “And all of these things can be achieved by having ESG-leading buildings, not just the environmental but that social value wellness experience.” The energy crisis also means occupiers want to lease out more sustainable buildings because of the lower costs during occupancy. Around two-thirds of ASX-listed companies have emissions targets and, as Uren points out, providing real estate that is fully electrified, energy efficient and renewable energy powered opens up the market. “[The energy crisis] is already here, it will only continue to become a higher cost problem over the next sort of transition periods,” Uren says. “And as a result, if you're a tenant looking to occupy a building, you’re wanting to get your operational costs down. “What better way to do that than to be in a highly energy efficient, high NaBERS building?” ▲ Melbourne's Council House was the first building in Australia to achieve a 6 star Green Star rating from the Green Building Council of Australia. Carbon neutral versus zero carbon Many buildings are currently being built to be carbon neutral with some confusion around the two different terms, JLL net zero carbon lead, Asia-Pacific, Stephen Brammer says. “Carbon neutral is essentially your short-term fix for your carbon emissions,” Brammer says. “And you’re just trying to make it go away for a short period of time, and then you pay some more money, make it go away again. “Net zero carbon, on the other hand, is about making a long term conservative investment in your assets and eliminating carbon emissions.” It also can help prevent greenwashing. “In a world where zero carbon is the gold standard, we’ve seen our clients migrate away from their carbon neutral commitments—there are a few reasons for this,” Brammer says. “There is the veracity of the carbon offsets that people are purchasing and the associated greenwash we have then seen for investors and consumers. “We’re seeing that the biggest reason with a building is ‘why are we buying offsets when we can just eliminate those emissions in the first place?’.” ▲ Lendlease’s 25 King Street in Brisbane achieved a 6 Star Green Star rating. The move towards zero carbon Market appetite alone is not the sole reason those who don’t retrofit will be left behind. NABERS ratings are also changing—replacing tickets with Renewable Energy Indicators with certification starting from the second quarter of 2023. From 2030, ratings for all buildings will be impacted with many not in the premium category of five stars and above. The equation is simple: inaction will put asset owners in the brown discount category but action will deliver ESG premiums and also open up financial opportunities and lower insurance costs. Changes in planning and financing Regulations are to change—the City of Melbourne is making an amendment to its Sustainable Building Planning Scheme to apply a NaTHERS minimum rating of 7.5 and best standards to all residential planning schemes and for them to target 5 star Green Star rated buildings. The City of Melbourne raised the concern last year that it would not be able to meet its zero carbon emissions goals as a city by 2040 if changes were not made to new and existing buildings. Construction and operation of commercial buildings accounts for 60 per cent of the City of Melbourne’s emissions while residential buildings account for just 6 per cent. “To tackle the huge issue of decarbonizing our city's built environment and seize the opportunities that are in front of us, we need to throw everything at this challenge,” says City of Melbourne strategy, planning and climate change general manager Evan Counsel. While the planning amendment will target new buildings through the planning process, the city still needs at least 80 existing buildings to be retrofitted for zero carbon emissions each year to hit its 2040 target. Consultation is currently open for Amendment C376 while the federal government is working on required climate change reporting for all businesses with turnover of more than $100 million with SMEs feeding in their data to big businesses that they work with. The banks have entered the discussion with all major banks in a net zero alliance and reconsidering financing for property as they try to align it with their own ESG goals. “From an investment perspective, the banks or the major Australian banks having joined the net zero banking alliance is going to kind of move this from being an option to being non-negotiable,” Uren says. There are already sustainability linked loans or green loans on the market with the Commonwealth Bank offering a property sustainability upgrade loan as a margin-free loan on capital expenditure with extended LVR on existing loans. Sustainable Australia Fund has a Sustainable Australia Fund Offering which is a green loan to help upgrade existing commercial buildings. Green loans offer lower rates and other incentives for developers looking for finance who want to build or upgrade buildings to be zero carbon. Indi, Investa’s build-to-rent platform, secured a $130-million green loan from the Commonwealth Bank to build it’s Indi Sydney City build-to-rent project in the Sydney CBD in October 2021. ▲ Fraser’s Burwood Brickworks, one of the Green Building Council of Australia'’ examples in its guide on electrifying new developments. Source: Green Building Council of Australia. What’s involved Upgrades to existing buildings can include removing gas completely from the building, solar panel installation, lighting changes, removing boilers, adding induction cooktops, air conditioning and insulation upgrades but also adding in bicycle storage, electric vehicle chargers and solar power storage via batteries. There is also the option to improve building management systems, install better metering and to set up contracts and purchasing power agreements with certified renewable energy providers. “Once our building is all electric, we need to look at how do we prevent these emissions,” Brammer says. “So it’s onsite renewables and this is an investment in an asset. “Once you have maximised your on site renewables, you can start using battery storage.” A sustainable future In five years, zero carbon will be more the norm, according to de Crespigny. “One bank has told me that they don’t want a lot of loans on their books in five years with less than five stars,” de Crespigny says. “They’re basically saying where we’re going to try and differentiate between the two types of assets from now.” Uren agrees: “Banks are the absolute movers of real estate change.” Brammer says incentives and regulations have a role to play. “I think we’re starting to move into that territory where we need both a big carrot and a big stick,” Brammer says. Retrofitting also makes a lot of sense for developers who may struggle to get planning permission to demolish and rebuild but who also face higher construction and material costs. It also limits construction and demolition waste heading to landfill. Counsel says developers are a key part of the process. “We know that to reach net zero, we need strong partnerships with industry,” says Counsel. “We need everybody in the room to act together in partnership and in collaboration. “We certainly can’t do this alone.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

[+] Go Green or Go Broke: Case for Zero Carbon Grows

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