Talking Property | NABERhood Watch

Featuring Sameer Chopra, Su-Fern Tan & Amanda Steele
Thursday 24 March 2022

AS:
Welcome to Talking Property with CBRE, a podcast in which our team of experts share their commercial real estate insights and industry leading perspectives. My name is Amanda Steele. I'm the Executive Managing Director of Property Management for CBRE, Pacific and I'm your host for today's episode.

Today we're chatting about CBRE's latest research report and it's a really good one NABERhood Watch with Sameer Chopra, Head of Research, Pacific and ESG Asia Pacific and Su-Fern Tan, Head of ESG. The report quantifies the benefits and opportunities from better NABERs ratings for Australia's office stock. This should be very valuable as investors build out their business case for net zero assets. Before we deep dive into the findings from the report. Su-Fern, can you briefly explain what NABERs is and why is it so important?

SFT:
NABERs is a benchmarking tool that measures a buildings operational efficiency. Buildings are rated annually and focus on metrics such as water, waste, energy or indoor environment. And ratings are also catered for various building types. For example, hospitals, offices and hotels. NABERs is important because it recognises the difference between a base building and tenancies and in doing so places the responsibility of consumption or performance on the right party. NABERs is also important because the NABERs rating will give you instant recognition on how an asset performs and when you are buying or leasing a property, you'd want to know what you are inheriting.

AS:
Yes, most definitely. So Sameer let's talk about the report. We're all aware that office landlords have NABERs high on the agenda as occupies prioritise energy efficiency. But what does the data tell us?

SC:
Look, we see four aspects of the benefits in the business case firstly, sort of lower operating costs, higher occupancy, higher rent and more compressed yields. And looking at each one of these in turn, you know, energy makes up about 10 to 15% of the operational costs of an office building and energy costs are lower as a percentage of rent by 0.9 to 1.5% for premium and grade A offices, which have a much larger share of high NABERs ratings. We also find higher occupancy rates. There's about a 4% spread between NABERs 5.5 and 6 star officers compared to their 4.5 star peers. And then if you move to rent, rental discounts apply for lower rated assets with premiums for the highest NABERs rated buildings. On yields it's a little bit more complicated, cap rates have traditionally been influenced by location within the city, for example is it in the financial district and the greater the building. But energy efficiency is starting to become a bigger part of the story. So our report lays out some of these handy metrics for building owners to consider in their NABERs improvement journey.

AS:
Yeah brilliant, thank you. Su-Fern, is this reflective as to what's happening on the ground in our cities? Are inquiries increasing or decreasing here?

SFT:
It absolutely is reflective of what is happening on the ground. The demand for NABERs ratings is increasing year on year as its importance is understood. What started as a voluntary rating is fast becoming part of regulation as government, as well as industry, picks up on its value. Inquiries for NABERs ratings in our business are increasing and we are seeing more types of NABERs ratings being asked for beyond the core NABERs energy and water ratings. It is fast becoming a commercial selling tool.

AS:
Brilliant. I found it really interesting in the report how vintage assets, those older assets, rated in comparison to the others built post 2000. Sameer, what are the stats on their performance?

SC:
Yeah, look, you often hear the argument that older assets are hard to upgrade and they represent a challenge in Australia's quest in net zero. We actually found something really different. We did a deep dive on office buildings that were built prior to the year 2000 and nearly a quarter of these officers constructed pre 2000, have a 5.5 or 6 star energy rating. Refurbishments and energy efficiency initiatives have driven much lower consumption. So just because an asset was built in the 1980s and 1990s does not hold it back from pursuing energy efficiency.

AS:
Which is really great news. Su-Fern when looking at refurbishing these assets, roughly how long is the journey to go from that lower star rating to a 4.5 star and above premium building rating.?

SFT:
It doesn't have to take very long at all. The approach that our teams would take is one that would optimize the operational efficiency of a building first and foremost, before looking into any initiatives that would require any capital investment. These OPEX saves can decrease consumption by up to 30% and can be done almost immediately. When you add in some lower ROI CAPEX spend such as led lighting, you can push consumption down and ratings up even further and then when you add a smart tech layer to that such as real time smart building analytics platforms, you'll be at peak performance.

AS:
So, Sameer for all those investors and office landlords out there, where is the best opportunity?

SC:
There is a good opportunity. We estimate that just over a million square meters or about 15% of the footprint is premium or grade A rated, but with the NABERs rating of 4.5 stars and the opportunity lies within these buildings as prime candidates for energy efficiency upgrades. These are assets which command a premium rent. They have excellent occupancy but could benefit from an improved NABERs reading which is what their tenants desire.

AS:
Of course, it's clear that everybody needs good NABERs. But if you would like to view the NABERhood Watch report, go to cbre.com.au/research-reports. If you like the show and want to check out more visit cbre.com.au/talking-property or subscribe on Spotify or Apple podcasts.

Thank you both for joining me today, and thank you for listening to Talking property with CBRE.

See you next time.