Green is the new black

Bayleys commercial and industrial national director John Church
Anthony De Francesco, Australasian executive director of IPD

Prior to the global financial crisis (GFC), “green buildings” were gaining some traction in the New Zealand market place as developers started embracing the concept of sustainable commercial buildings in line with world trends.

As the brakes went on development funding and key players in the market place took a step back from new builds, the green issue became somewhat muted.

National commercial director for Bayleys Real Estate, John Church, says astute developers have again bought into the concepts of efficiency and resilience of green star-rated new buildings and it is the ‘new normal’ – particularly in the office sector.

“Post-GFC, ‘green’ became a luxury. However, long-term thinking dictates that environmentally sustainable buildings will be better future-proofed in a world which is increasingly touting ‘green’ as the new black,” says Mr Church.

“The World Green Building Council recently congratulated New Zealand for its achievements in the green building sector, applauding our recognition of the environmental, social and financial implications of green builds.

“Tenants are also waking up to the concept of sustainability and are demanding better working space credentials for their staff.”

The New Zealand Green Building Council (NZGBC) sets the tone for green star-rated building work in this country. NZGBS is a not-for-profit industry organisation dedicated to accelerating the development and adoption of market-based green building practices.

“NZGBC recently announced the 100th Green Star rating of a New Zealand commercial property project which confirms that the sector is recognising the benefits of green buildings in maximising value and performance,” says Mr Church.

Auckland Council’s proposed unitary plan includes sustainable building guidelines claiming those buildings “which are efficient to operate, minimise environmental effects and are healthy environments in which to live and work are a key component of a quality built environment and help to address the issue of climate change”.

The Council’s fact sheet cites the benefits of going green for office and industrial buildings as including 25-50% energy savings, 40% water savings, 23% increase in productivity and health, 6% increase in lease value and 20% increase in market value.

Mr Church says the lease values and market values of green buildings will ultimately be assessed on a case-by-case basis, but the time may come when going green will be the cost of staying in the commercial property game.

“The green equation is likely to be market-led rather than regulation-driven in the short term,” says Mr Church.

“As tenants become more discerning, those property owners who have green star-rated buildings will have a larger pool of potential tenants to choose from and they will be able to command higher rents,” says Mr Church.

“This all helps to drive returns on investment. Sustainability will become part and parcel of a building owner or developer’s overall risk framework.”

Investment Property Databank (IPD), which monitors property performance in over 30 countries, has established a Green Index for assessing the performance of commercial property in Australia and New Zealand.

While green star-rated assets remain a small slice of the office sector as a whole in both countries, IPD felt it important to look at the performance of this sector to offer a point of reference, according to Australasian executive director of IPD, Anthony De Francesco.

“We decided to take green star-rated assets and stratify them within the investment return structure to see whether they represent or offer a different investment proposition from mainstream office assets.

“What we found from our research in the first quarter of 2014 in New Zealand – and this is backed up by Australian data – is that green star office assets have firmer capitalisation rates than non-rated assets.

“We also found that the weighted average lease term is longer, the vacancy rate is lower, capital expenditure is less, the base rentals and net operating incomes are stronger - however operational expenditure (opex) is higher.

“Building owners can expect to take a hit on opex in the short term, but over the life of the building this will reduce.”

Mr De Francesco says the higher rentals achieved by green star-rated buildings is reflective of tenant demand and says that owners who improve the sustainability of their buildings are more likely to see stronger investment returns and lower risk.

“Green-rated buildings are another refinement on the quality spectrum and while the New Zealand green-rated market is in an embryonic stage, the New Zealand results we attained are consistent with those we see in Australia.

“Australia is a world leader in the green building arena. They asked the question and decided that, yes, there is a value proposition in green, whereas in the US, they are still debating that topic.”

Mr De Francesco says there is a stream of thought among investment circles supporting the belief that had the Christchurch earthquake not happened, New Zealand would be miles ahead of where it is currently on the green build spectrum.

Bayleys national research manager, Gerald Rundle, says prior to the Christchurch earthquakes, office tenants selected space – price aside – on location and grade, with a growing influence of sustainability and green rating. Seismic-compliance ratings were relegated well down the list.

“However, in the wake of significant earthquake events around New Zealand, seismic grading is now a key consideration across most markets although with greater priority in the areas perceived to have a higher earthquake risk such as Wellington and Christchurch.”

Mr De Francesco believes that going forward IPD will also build seismic factors into the green index given that it is a pressing issue in New Zealand.

For further information contact:: John Church Bayleys Real Estate 021 370 034, Anthony De Francesco IPD Australasia +61 2 9033 9356

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