The move toward sustainable, environmentally friendly commercial buildings has received its greatest push yet analysts say. Recently announced energy efficiency targets for new developments in Sydney call for all new office buildings, hotels and shopping centres plus major redevelopments to meet minimum energy ratings from January 2023 – and then achieve net-zero energy use from 2026.

The Australian-first development standards announced by the City of Sydney Council signal “huge change” ahead for commercial real estate and property funds said JLL’s head of strategic research Annabel McFarlane. Supported by major developers, they come at a time when Sydney has committed to being carbon neutral by 2035 and Melbourne by 2040. This meant it was only a matter of time before other major Australian centres followed a similar path, Ms McFarlane said.

“Governments are thinking about climate change and working on getting cities to carbon neutral status by using both carrot and stick approaches,” said Ms McFarlane said in an address to a Property Funds Association’s master class on the impacts of ESG and sustainable buildings on CRE.

There is a major link between our emissions and our buildings, and if anyone can change things, it’s property. JLL now has a whole team reporting on sustainable buildings.”

Under the SCC’s new requirements, from the start of next year all development applications must have a minimum 5.5 NABERS (National Australian Built Environment Rating System) energy ratings. New developments must also achieve net-zero carbon in their energy use from 2026.

Rising to the challenge

With increased regulation inevitable, achieving energy efficiency targets would require commitment from landlords and governments plus “transformational thinking”. Sydney, Melbourne and other Australian capitals were yet to see the level of targeted environmental requirements now in place in New York and London. “There is also still some way to go as currently only 56% of all Australian office assets have a NABERS rating and few of these are six-star asset,” Ms McFarlane said. “This will need to change as governments and corporates drive demand for greener buildings.”

In addition to the SCC’s new standards, the Victorian government has decided that any of its own new office buildings and tenancy fit-outs must have a minimum five stars energy efficiency rating from 2021 and six stars from 2025.  “The closer we get to these deadlines the more regulation will come in,” Ms McFarlane said.

Property owners who already possessed six-star assets would have the greatest advantage, but these were few and far between. “The government will need to work in partnership with landlords committed to upgrade their assets over an agreed timeframe,” Ms McFarlane said. “To meet targets by 2050 we need to retro fit 3% of buildings a year, so the change required is immense.”

Reaping the rewards

Analysts said there had been such a notable shift towards accredited and sustainable assets in recent years that any pain associated with meeting environmental targets would be assuaged by the gains of doing so. According to Knight Frank research measuring the impact of a NABERS energy rating of five stars-plus across 300 commercial transactions, the buildings able to offer the top benefit fetched up to a 17.9% premium on their sales price, compared to an 8.3% premium on lower rated buildings. The green buildings also attracted more potential buyers during their sales campaigns as well as a higher and broader volume of lessees. 

The bottom line was that real estate was coming under greater scrutiny as both owners and occupiers aimed to hit their own green targets said Knight Frank senior analyst Matt Hayes. 

“As more companies embed ESG aims and emission reduction targets into their corporate strategies, we will see more capital being invested in sustainable real estate solutions, the retrofitting of inefficient spaces, and property technologies for measuring and improving buildings’ operational carbon footprint,” Mr Hayes said.