575 Bourke Street, Melbourne.

In great news for Environmental Upgrade Agreements, wholesale fund manager Trust Capital Advisers and its advisers have negotiated a $1.8 million energy upgrade of an office building in Bourke Street just as it’s about to hit the market for sale.

Even better is that the deal managed to encourage most of the tenants in the building into the EUA charge,  something not always easy to achieve in the past, and a signal that the funding program is gaining traction after a long haul. The last EUA, a small deal, was signed was in 2014, but several more are now understood to be underway.

The building, a 16 storey office at 575 Bourke Street, was bought from Deutsche for about $90 million in 2015 and part of a portfolio of five buildings expected to collectively reap about $700 million for the vendor.

Caoimhin Ardren, Energy Action.

Finance was arranged by Sustainable Melbourne Fund. Major consultants were Energy Action in partnership with CBRE.

The upgrade, which started last year and is due for completion in the coming months, is expected to cut building electricity use by 34 per cent and gas by 54 per cent, while boosting the NABERS rating from 3 to 4.5 stars. The value of the building is also projected to increase with better performance.

Under the terms of the EUA, TCA will repay the cost of the upgrades over 10 years.

The scope of works includes mechanical and BMS upgrades, sub-metering and LED lighting installation, and the installation of solar PV on the building’s rooftop. While the project has committed to achieving 4.5 star NABERS, additional tuning works may see it achieve even better performance.

“EUAs allow for financing costs to be repaid over time based on the savings achieved on the base building energy cost,” Energy Action general manager, projects & advisory services Caoimhin Ardren said.

He said that while previous EUA negotiations have encountered challenges, Energy Action, CBRE and TCA were able to collectively communicate the proposed EUA concept and deliver a clear message to the tenants at 575 Bourke Street.

The result was 80 per cent of tenants came on board.

CBRE’s John Kiff, national portfolio engineer for TCA, said strong landlord and tenant relationships had been key to communicating the importance of the EUA and its mutual benefits.

“The tenants at 575 Bourke Street have been thoroughly supportive of the energy enhancements and have embraced the environmental upgrade agreement in relation not only to the overall energy uplift, but particularly the improved airconditioning of the tenancies,” he said.

“This has been a whole building team effort, which will lead to significant sustainability benefits.”

Mr Kiff said the degree of tenant buy-in has now risen from 80 per cent to 100 per cent during the course of the project, with two new tenants over 20 per cent of the building’s occupancy signing head leases and engaging with the upgrade during the works program.

He said the main message to tenants were that the base building would improve, that they would have greater control over the HVAC in their tenancies, and that airflow would improve.

From “hair dryer to fully controlled environment”

“There will now be full control of the building – like going from a hairdryer to a fully controlled environment.”

John Kiff, CBRE.

This also comes at no cost to tenants.

Other works underway include upgrades to the lobby of the building and full end of trip facilities including male and female change rooms, showers and lockers, and bicycle parking.

This is being funded through the energy savings, Mr Kiff said.

“It’s a way of pushing the capex forward.”

More demand for EUAs

Scott Bocskay, chief executive of Sustainable Melbourne Fund, which financed the Bourke Street deal, said there were more EUA deals in the pipeline, including projects outside the usual commercial office sector.

SMF is currently working on around 20 EUA projects involving assets across Victoria including manufacturing, food manufacturing, agriculture and commercial offices.

“The EUA framework is applicable to a range of other project opportunities,” Mr Bocskay said.

Mr Ardren said Energy Action was seeing an increase in design and consultancy work on upgrades within the B and C grade office market, “as building owners look at ways to increase energy efficiency and maximise asset values in a buoyant investment market”.

“With hundreds of B and C grade office buildings in Australia and metro areas, we see substantial upside for building owners, tenants and the environment.

“This will bring these properties on par with many newer, more energy-efficient office buildings.”

Mr Bocskay said the 575 Bourke EUA was the first signed in 2016, following the Melbourne CBD EUA program being extended from its original end date of December 2015.

He said SMF was “very proud” of the 575 Bourke St deal.

“The work between EnergyAction, CBRE the owners and the tenants was a great example of the collaboration required to undertake these projects.”

It was also a good example of how projects can be pulled together when teams work well together, he said.

“EUAs are a tool that enable that collaboration, and can deliver positive outcomes for everyone involved – and as a result, we get better buildings.”

Mark Coster of CBRE and Rob Sewell of JLL are agents for the portfolio sale with buildings also potentially offered separately.