Why NABERS is the new norm - regulatory pressures changing the property landscape

How NABERS ratings drive valuations and identify risky loans

Embrace green buildings or lose tenants and investors was the message delivered by Tony Lombardo, CEO of Lendlease Global, an outtake of an interview published in the Australian Financial Times. That was 2021. The Australian government’s Climate Change Bill passed the Senate in September 2022—so it is now law. There is a Long-Term Emissions Reduction Plan that brings together and builds on other Australian Government strategies, including The Trajectory for Low Energy Buildings (approved in December 2018), which was part of the National Energy Productivity Plan. This strategy is in line with the Albanese government’s commitment to achieve net zero emissions by 2050, and it remains a key initiative to address Australia’s 40% energy productivity improvement target by 2030.

The problem is that an existing sustainability framework has hardly acted as a catalyst for change. And now, the built environment, which accounts for 18% of direct carbon emissions in Australia, is under pressure to fulfil net zero operational carbon emissions by 2030.

Back in 2010, the Commercial Building Disclosure Policy (CBD) was introduced. It was the first globally. CBD is a national mandatory disclosure program for large office buildings with greater than 1,000 square meters to provide energy efficiency information to prospective buyers and tenants. The CBD program uses the National Australian Built Environment Rating System (NABERS) as its rating system. And with the commercial real estate market now facing significant challenges, investors and banks are utilising these sustainability credentials to assess building values, limiting their exposure. As Martin Kelly pointed out in the Australian Financial Times, the greener the building, the more it is worth.

“Analysis of more than 300 office sales over the past decade in Sydney and Melbourne revealed the impact of green credentials on asset values. Offices with NABERS ratings of up to 4.5 stars are worth an average of 8% more than unrated buildings on a per-square-metre basis. Buildings rated between 5 and 6 stars attracted an 18% premium.”

What is NABERS?

The National Australian Built Environment Rating System (NABERS) is a voluntary system with design standards to measure a commercial building’s sustainability – there are rating systems for a number of impacts including energy, waste, water and more. The system rates buildings on these impacts from 0 to 6 stars, with six representing exceptional greenhouse performance and resource efficiency. NABERS is a national initiative managed by the NSW Government on behalf of the Federal, State and Territory governments of Australia. The website provides tools to self-assess buildings or find a professional to conduct an accredited rating.

In July, Commonwealth Bank, which has an A$83 billion commercial property loan book, announced its own tool, developed alongside Dutch consultancy CFP Green Buildings, in cooperation with the Green Building Council of Australia and NABERS to evaluate asset upgrade costs. Poorly credentialled or unrated assets will not be aligned with Australia’s net-zero targets. They also won’t secure tenancies. Banks don’t want risky levels of commercial real estate exposure. It won’t be easy for investors, but this increase in lending will help elevate commercial prices, and banks won’t have to mark down the value of loans in most cases. It is likely others will follow a similar playbook, gorging on real estate commercial loans and related green investments in big cities as the sector transitions to net zero over the coming decade, and investors and landlords will have to recalibrate.

Big funders are enlisting NABERS ratings to assess investments

Based on data released in the Annual Report, just 23% of buildings hold NABERS ratings. And that puts net zero carbon targets at risk. Micheal Bleby paraphrased a JLL report for the Australian Financial Times, “Australia’s offices are dragging their feet in the sustainability race.” Still, it is hard to move entrenched interests, and without regulatory strengthening, commercial property just won’t be ready for net zero carbon. The current approach will be ineffective, which officials say will reduce carbon emissions by 43% by 2030 and to net zero by 2050.

• From 2023, the (NSW) State Environmental Planning Policy (Sustainable Buildings) 2022 (the Sustainable Buildings SEPP) comes into effect. All new and existing buildings in NSW will be operating at net zero by 2035.
• By 2040, all commercial buildings in the City of Melbourne will be 5 star NABERS or higher energy rated, be all-electric, and have an ongoing improvement plan to get to absolute zero carbon after 2040, including embodied energy.

For investors, policy creates new timelines and performance metrics. The NABERS Sustainable Portfolios Index (SPI) provides a transparent portfolio of current performance on office carbon emissions, water usage, and waste—NABERS Waste for Offices ratings increased 72% during the 2021/2022 period. It sets a new high bar in the race towards net zero. For big funders assessing investments, NABERS ratings are identifying and verifying high-performing portfolios, the assets pushing up valuations by 40%. And with a serious credit crunch developing, banks and private real-estate lenders, ratings mean new opportunities. Lending is the lifeblood of all real estate. Lendlease, in just 18 months, raised A$3.1 billion in sustainability financing.

Clare Morgan, Executive General Manager [Business Lending] of the Commonwealth Bank, stated in a 2021 press release that investing in sustainability upgrades also makes commercial sense. “It [investments] can boost the value of properties while reducing operational costs, making the property more attractive to long-term renters and potential buyers.”

That’s lending. But there are also government funding sources for developing green buildings or retrofitting historic builds, including a mix of one-off grants, co-finance packages, tax incentives and mortgages, as Sam Tamblyn confirms for the Australian Financial Review:

“Common projects funded by one entity—the Green Building Fund, are upgrades to heating, ventilation and air conditioning systems, lighting, waste management systems and energy management control technology to assist climate intelligence.”

Commercial real estate’s waste management agenda

The climate-related financial disclosure consultation paper bill is interesting in that it delays mandatory ESG reporting until 2024/2025, currently mandated in the European Union, U.K. and New Zealand markets. London, U.K., the Curtain House, currently a Grade II listed ‘substandard asset’, will be upgraded into a sustainable landmark. As Karen Day writes for RICS, “According to brokers close to the deal, the fund not only priced in the cost of decarbonising the building but made “aggressive assumptions” on the impact this would have on its rental and occupancy rates and was able to outbid its competition.”

As Day points out, such deals are anecdotal evidence that, in many sectors of the commercial property market, the greener the property, the higher potential rental premiums, occupancy rates and sales valuations. It is in part due to this increasing emphasis on companies' energy, sustainability and governance responsibilities and climate risks in elsewhere that NABERS recorded more than double the number of waste certifications in 2020. “There is an obvious commercial imperative as building owners race to achieve green building certification as a point of difference to attract and retain tenants,” said Damien Silvester, a sustainability analyst at JLL.

“The inability to measure and validate waste management strategies could be the difference between a 5 star and a 6 star rating,” he said.

NABERS wants to make sure they capitalise on climate enthusiasm, highlighting commercial space could do a lot more to fight climate change, including reducing waste. The less you landfill, the higher the star rating. And as Sam Tamblyn writes for the Australian Financial Review, “Going green is paying off for property investors.”

Owned by Active Super, 25 years of JLL management have allowed MarketPlace Leichhardt to commit to green investments—various initiatives introduced to reduce electricity and water consumption. Waste is minimised through recycling programs.​ JLL recently published their case study. They are, for example, recycling retailer food waste, 200 tonnes of it, producing some 1.8 million megajoules that could power up to 720 homes—and carbon emissions were reduced by 431 tonnes. The time frames are unclear, but it would be at the time of their 5-Star NABERS Energy rating, achieved in 2012. As Larry Schlesinger quoted Tony Lombardo, CEO of Lendlease Global, in his piece for the Australian Financial Times:

“Property companies that haven’t turned their focus to developing sustainable buildings will struggle to attract investor capital, corporate tenants and the talent to undertake future projects.”