Climate change is a major international issue. All levels of government in different countries are setting greenhouse gas omissions targets that to most people seem unachievable.
As this is a major international issue, let’s narrow it down and focus on Brisbane CBD.
Brisbane’s CBD is full of power hungry buildings that need to be tamed. There are a lot of news stories going around at the moment describing the very poor state of the energy efficiency of Brisbane’s office building stock. You just need to take a walk through town to see the extent of the problem, tower after tower reaching towards the sky with small windows dotted through the solid external walls. Why were they designed that way? Well, because that’s the way it was done in the 1970s and 80s and unfortunately they relied on very big old-school plant and equipment to provide the cooling and power requirements that are needed to run such large structures.
According to the Commonwealth’s NABERS register, close to half of Brisbane’s CBD office towers score poorly to very poorly. In other words, these old towers are sending tonnes of carbon dioxide into the atmosphere.
For the landlords of these old towers, this problem is getting bigger by the minute. These landlords will struggle to attract top quality tenants who are willing to pay top dollar because their buildings are not ægreen’ and let’s face it, old fashioned. This means they may have to accept decreasing rents and increasing maintenance and running costs. This is not a good formula.
Even if the owner of one of these old towers wants to sell, they may find it difficult to make a profit. The reason for this is that purchasers will look at two main things; the first is the rent, which is lower than it could be and the second is the running and maintenance costs, which are higher than they should be.
As I see it, these problems facing the old Brisbane CBD office stock have two solutions. The first solution is to demolish these towers and rebuild. A long demolition, re-design and re-construction period, coupled with the huge holding costs makes this option not very attractive. The second solution is the æR’ word that is being thrown around a lot at the moment û retrofitting.
So what is retrofitting? Wikipedia describes it as follows:
Retrofitting refers to the addition of new technology or features to older systems.
- power plant retrofit, improving power plant efficiency / increasing output / reducing emissions
In other words, you need to pull all of the plant and equipment out of an old building and replace it all with more energy efficient alternatives. Sounds scary hey?
Well, apart from the difficult logistics involved and the cost of retrofitting, the benefits for the property owner can be huge. Not only will the value of their property increase, but depending on the extent of the retrofit, the building’s energy consumption can drop dramatically, resulting in a massive reduction in the buildings running and life cycle costs.
Retrofitting is an expensive exercise, so let’s look at the issues and see how it can work.
Tax Breaks for Green Buildings? The Gillard Labour Government has been in consultation with industry in order to define the specific criteria and incentives for property owners to implement energy efficient retrofits over the past few years. The preliminary decision was, if the building qualified for the tax break, the building owner could be eligible for a one-off bonus tax deduction of 50% of the cost of the eligible assets and / or capital works. This would have been a great incentive for building owners to retrofit their building but the Gillard government scrapped this tax break before anyone could take advantage of it.
State Government Assistance? The New South Wales and Victorian state governments have brought in æEnvironmental Upgrade Agreements’ which help landlords finance the retrofitting process. Older Sydney and Melbourne office buildings are already ôgoing greenö. Unfortunately for Queensland there are no such agreements in place and with the state of the current budget, this is not likely to happen any time soon.
However, Low Carbon Australia (LCA) is helping to fund these specific types of projects. LCA is a public company set up by the Australian Government to help deliver energy efficient retrofits with the aim of reducing carbon emissions. LCA is offering competitive market rate finance to developers who wish to undertake an energy efficient retrofit , so there is some help at hand.
A further issue is created by the logistics of the retrofitting process. There are two main ways of doing this – The Fast Way or the Steady Way.
The Fast Way – Move everyone out of the building at the same time. Once everyone is out, the building undergoes a transformation from an old tower to a new greener, more attractive tower. The main advantage of this method is the speed. The main disadvantage of this method for the building owner is that they will not receive any rent whilst the retrofit is under way.
The Steady Way û Retrofit one floor at a time. The advantage of this method is that you can still receive rent whilst each floor is being retrofitted with new glazing, AC & electrical equipment etc. The disadvantage is the constant decanting of office workers to either other floors or finding off-site temporary accommodation. The other disadvantage is that this method takes a longer time frame.
This may seem like taking a risk, but with risk comes reward.
Two property developers have made news by retrofitting their old Brisbane office towers very successfully.
The first retrofit was the Magistrates Court back in 2005-2006. The building was purchased in 2005 by Citimark for $7 million. The following year Citimark spent $15 million doing a complete Retrofit transforming an old office space into a cleaner A-grade office space. The first result was that all floors were leased upon completion in November 2006. This building was then sold to GE Capital in 2007 for $55 million.
The second retrofit was 26 Wharf Street which was built in the 1980s and was purchased by the Harvest Property Group in 2010 for $7.95 million. The Harvest Property Group then spent $1.5 million on the retrofit. The building was sold for $4.3 million more than the 2010 purchase price. The building energy consumption was reduced by more than 40% and the NABERS rating of the building increased from zero to 4-stars.
As shown by the two above examples, retrofitting an old office tower into a clean, green, A-grade office can be amazingly successful with huge profits to be made.
This type of project may also be very profitable for developers who may prefer to hold on to their properties. Not only would they benefit from reduced running costs and increased rents, they would also benefit from significant tax depreciation benefits.
In order for building owners to maximise their tax depreciation entitlements, they will need a detailed asset register linked into the tax depreciation report for the property, even if they already have an existing tax depreciation report. Depending on how long a property owner has held an old office tower, the tax benefits of writing off energy inefficient and/or redundant plant and equipment could go a long way to helping the owners pay for the retrofit. Once the retrofitting starts, the property owners can then single out every individual item of plant and equipment that has been removed and write-off its remaining value.
For more information on the tax depreciation benefits of retrofitting and old office tower, contact Luke Anthony, Asset Services Manager, Mitchell Brandtman, Tel. 07 3327 5000.
