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WA industry in push for building upgrade finance

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Vacancy rates are hitting Western Australia hard so the City of Perth and Property Council are pushing for changes to the state’s Local Government Act to enable building upgrade finance (BUF), in a move designed to improve underperforming stock.

Also known as environmental upgrade finance, which involves entering into an environmental upgrade agreement (EUA), the mechanism of cheaply financing sustainable building upgrades while overcoming split incentive issues has been gaining traction in Victoria and the City of Sydney. But a legislative change is required to enable such schemes in WA, according to PCA Western Australia executive director Lino Iacomella.

He told The Fifth Estate his organisation was now in campaigning mode on the issue.

“The main reason is we have some of the highest vacancy rates in the country,” Mr Iacomella said.

“There is a growing stock of underutilised older buildings that often struggle to get even simple upgrades with traditional financing methods.”

City of Perth commissioned research last year into potential re-use of the city’s ageing C-Grade building stock. It was undertaken by architects Cameron Chisholm Nicol, Wood & Grieve Engineers and property market consultancy Y Research.

It found that about 60 per cent of Perth’s office space comprised C-Grade buildings generally over 20 years old. Y Research data showed a vacancy rate in that tranche of 25.7 per cent, equating to around 340,000 square metres of vacant space across metropolitan Perth.

The PCA and City of Perth held an event on Monday this week to explain the concept of BUF and its relevance to stakeholders.

About 80 people attended, including representatives from City of Perth and other local governments such as Fremantle City Council, building owners and their representatives, managing agents, legal experts and engineers.

Mr Iacomella said the event was about people becoming more familiar with BUF.

“It can be a difficult concept to get your head around,” he said.

“There needs to be a much more public display of what the benefits are.”

But he said there was real appetite in the sector for the proposal.

One of the reasons owners could struggle to obtain finance for upgrades, he said, was first a requirement for owners to commit to investing in a building when incomes from the building are not high.

“There is a high degree of risk.”

He said it was “too easy” for owners to say to themselves, “Let’s wait for the next [property] cycle.”

Financiers can also find it difficult to make the case for giving projects the nod too, due to the high capital provisions now required for financing, particularly in terms of security against borrowings.

The amounts requested are also often small, ranging from around $50,000 to $100,000, Mr Iacomella said.

Overall, not only is it difficult for owners to arrange finance in the current market, it simply often isn’t viable in terms of repayment terms.

BUF by comparison would require zero upfront cost, and no additional security.

And while regular finance often won’t cover all of the project cost for an upgrade, BUF could.

Mr Iacomella said the financiers making funds available under a BUF model often have a “broader perspective”.

They may, for example, be aware the building is currently untenanted, so will make provisions around that.

The terms are also easier, with repayment terms frequently 10 years or longer, reducing the risk of a need to refinance, compared to the traditional lending term of 2-5 years. This also means annual repayments are lower.

“Traditional financing puts a lot more pressure of cashflow,” Mr Iacomella said.

The mechanism also creates a win-win for tenants and owners, as it locks in the benefits in terms of energy savings and an improved working environment for tenants.

“It encourages whole-of-building improvement.”

Owners benefit from lower operating costs and an increase in building value.

The model also creates a mechanism for sharing costs and benefits that resolves the split incentive.

As the finance is repaid through an additional charge on council rates, owners can pass on a proportionate share of that to tenants. At the same time, they are obligated to also pass on the saving in base building operating costs, and tenants may also benefit from lower tenancy operating costs.

Mr Iacomella said an “overriding factor” in terms of the benefits of BUF is that through a financial facility and a legal contract, it actually locks in environmental savings.

That adds a third win to the equation – lower carbon emissions from the commercial building sector.

It is the aspect of repayments being administered through local government rates that necessitates the legislative change in the Local Government Act.

Serendipitously, that very act is currently under review in WA.

“The opportunity of having the act reviewed has given [the sector] renewed interest in building upgrade finance,” Mr Iacomella said.

The PCA made a submission to the public consultation process, which closed last week. Enabling BUF was the core of its position on the review, he said.

He said City of Perth has “taken a leadership role” in terms of the required changes to the act.

The council, which is currently at the centre of a scandal, is still pursing the BUF agenda, according to a council spokesman.

The elected council is currently in suspension, and three commissioners have been appointed by the state government – chair of commissioners Eric Lumsden, and commissioners Gaye McMath and Andrew Hammond.

In a media statement released last week, City of Perth chief executive Martin Mileham said the appointment of the commissioners was a “much needed circuit breaker for the city’s ratepayers, community and over 760 hard working men and women at the city”.

The commissioners formally commence their role at a special council meeting on Thursday.

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