More evidence that Retrofits and Building Upgrade Finance can work

Retrofit to Profit conference: Building Upgrade Finance works very well indeed as far as one building owner at Parramatta, west of Sydney, is concerned.

According to Praxis Capital general counsel, Michael Peters, a speaker at the recent Retrofit to Profit event in Sydney, his company’s M20 building, which is reaching completion of a three-year building upgrade program, and used BUFs, has achieved some great results.

It has full occupancy and shows an increase in rental yields of 300 per cent, with outgoings for energy costs down by 85 per cent.

Peters told The Fifth Estate that on a monthly basis, energy costs fell from around $11,000 to 12,000 a month to between $2000 and $3000 a month – despite there being more people in the building.

Tenants are not charged for energy outgoings, he says.

In fact the Praxis was able to attract more tenants than could be accommodated, and now has a waiting list.

The cost of the upgrades has been funded by an increase in rents, and the savings on energy. The net result has been zero impact on the owner’s balance sheet.

Instead of discounting or offering “freebies” to tenants, the deal was offered of no charges for outgoings, and modest annual rent increases.

In his presentation, Peters highlighted the value of this proposition for both owners and tenants.

“As long you don’t overpromise relative to what the market wants, you don’t have to give freebies or discounts,” he says.

Upgrades to the building included HVAC upgrades, lobby upgrades, installation of LEDs and sensors in common areas and smart metering. Air filters have also been installed to improve indoor air quality.

Peters says that there is a misconception that the yield from upgrades is “disproportionate” to what an owner receives back.

“People have been trying to argue that if you fix the building, you never get [the spend] back.

“We have proven this is not true.”

The lower range of the commercial office tenant market, he says, can see the value in low rents and no outgoings.

At M20, tenants get an A-class building while paying B-class rent. Most of the tenants in the building are “people in their 20s and 30s” who can see the potential of the building and its location.

Praxis has been working to engage with other building owners in the area to help finance building upgrades.

However, Peters says many of those property owners are no longer in the market for an EUA as they have had their commercial properties rezoned by council to residential.

They are being told to demolish their existing building and build apartments instead, he says.

But there is a shortage of affordable B and C class office space – and one way to resolve this is fix up existing buildings rather than demolish them.

Another big issue for commercial owners in the B and C grade market has been an unwillingness of the banks to lend for upgrades because they “don’t see” the increase in value or yield.

It can also be a challenge to reclaim from tenants the dollars spent, Peters says.

“Upgrades look like capital spend, not outgoings.”

He suggests owners should take a similar approach to mobile phone contracts – with modest increases in rents annually.

Another presentation, by Anthony De Francesco, director and founder of Real Investment Analytics,  De Francesco showed that capital values and yields are both improved when a commercial building has a high NABERS performance rating.

The investment returns are higher for 4-6 star rated NABERS energy rated buildings than 0-3.5 star rated buildings for both prime and secondary grade office markets in both CBD and non-CBD locations, he says.

Green Star ratings also deliver investment returns that outperform all non-rated properties over a five year period. 6 Star Green Star rated buildings deliver the strongest returns.

A Green Star rating delivers on average 23 per cent higher capital value, and 20 per cent higher net rental per square metre.

De Francesco says that the value proposition for rated buildings is supported by a broader set of performance measures. These are, however, highly influenced by market type, market quality, market location, and market cycle.

Other speakers at the event included: Luke Menzel, chief executive of the Energy Efficiency Council: Rachael Scott, environmental finance manager at Eureka Real Assets; James Chisholm, chief executive of NuGreen; and Braith Williams, Readers Digest building owner and executive director of Argus Property Partners.

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