Upgrading buildings to higher sustainability standards to deliver long-term benefits

AUSTRALIA, 1 February 2022 -The age profile of existing buildings will become an important focus in CBD markets and upgrading ageing assets using current market conditions can help retain existing tenants and reposition assets in order to attract tenants.

JLL’s Sustainability engineers have guidelines about the types of environmental initiatives required to achieve higher NABERS Energy ratings and lower carbon emissions and can also explain the benefits that flow from investment.

The guidelines start with typical investment and costs to uplift an asset to 3 stars and every half star rating up to 5.5 stars. JLL estimates that to upgrade an asset from 4.5 stars to 5.5 stars could cost in the region of $70 per sqm, though these costs are typically included with the cost of major projects related to attracting tenants which can add to expenditure.

Higher NABERS rated assets have lower carbon emissions. For example, 3 stars energy rated office assets have 145 average GHG Emissions per sqm per annum, compared to 73 and 24 GHG Emissions per annum for 5-stars and 6.0-stars NABERS buildings respectively. As an example, 6 stars NABERS buildings have 77% less emissions than 3 stars NABERS buildings.

JLL’s Head of Energy & Sustainability - (Australia) Riccardo Rizzi said, “Increasingly, carbon emissions will become an important metric for both asset owners and occupiers. An occupier’s capital investment in their tenancies typically occurs in line with lease renewals as they take advantage of landlord incentives. However, if an occupier wants to achieve a sustainable fit-out but their current building has a low NABERS rating and older services and infrastructure it will cost them more to do their refurbishment project.

“It could mean that the tenant’s financial analysis leads them to conclude that relocating is cheaper than renewing. The same analysis applies to new leases, as buildings with older services and infrastructure will cost more to fit-out. The financial metrics alone can influence decisions about which building a company decides to lease,” said Mr Rizzi.

On average upgrading a prime grade asset from 4.5 stars to 5.5/6 stars indicates a 15% rental uplift with prime net face rents averaging $572 per sqm per annum for 4.5 stars NABERS assets compared to $659 per sqm per annum for 5.5 and 6 stars rated assets. However, there anomalies, Sydney CBD prime grade 4.5 stars and 5.5/6 stars corresponds to average net face rents at $1,068 per sqm per annum and $1,048 per sqm per annum respectively i.e., approximately $20 per sqm less in rents according to JLL Research.

JLL’s Senior Director of Research - (Australia) Annabel McFarlane said, “A higher market rent is not a clear driver to upgrade, in most markets, and higher rated assets are usually newer and have other additional features that warrant higher rents - wellness features, flexible spaces, new technology and end of trip facilities modelled on luxury hotel style amenity. Therefore, expenditure on environmental building features by themselves will rarely result in an equivalent rate per sqm rental increase, though there are benefits in utility outgoing costs.”

JLL has assessed the saving in utility costs is in the region of $9 to $10 per sqm per full star rating uplift.

Ms McFarlane said, “However, our analysis also finds that higher rated buildings also justify lower investment yields. The difference between average yields for a 4.5 star and 5.5/6 star rated building is 36 basis points nationally, and marginally sharper in Sydney CBD, as investors appreciate lower risk in assets that have already had capital expenditure invested in energy efficient and other initiatives.

“Though an ESG pricing premium is hard to separate from other features that drive capital values there is certainly a liquidity premium, and wider buyer pool for sustainable assets. Investors and capital partners increasingly find their own mandates require their investment decisions to be viewed through a sustainability lens,” Ms McFarlane said.