Australia will start requiring landlords to disclose energy efficiency ratings for their office buildings when leasing or selling from the start of November.  Nearly a third of the Australian office market is currently rated for energy efficiency by the government and the new legislation will likely have an impact on valuations and create a push for upgrading efficiency.  Here are some questions and answers on how the new regulation works, how foreign investors and REITs will be affected, and what implications the new rules could have on the property market.

How do the new rules work ?

Sellers or lessors of office space of 2,000 sq metre (21,530 sq ft) or more will have to disclose an up-to-date energy efficiency rating. Starting from Nov. 1, owners will need an energy rating from the National Australian Built Environment Rating System (NABERS) when leasing or selling. When putting properties on the market, advertisments should include the ratings. The NABERS rating measures energy performance on a scale of 1 to 5 stars with the median market performance currently at 2.5 stars.

After a one-year transition period, building owners will be required to provide further information such as an assessment of tenancy lighting.     Failure to comply with the regulations, could mean a civil penalty at a maximum of A$110,000 on the first day, with an additional daily fine of A$11,000 thereafter.  The building sector accounts for 19 percent of total energy consumption in Australia and is responsible for 23 percent of green house emissions.

 The recently elected government of Prime Minister Julia Gillard has made proposals on funding aids including extending a Green Building Fund with A$30 million available ($29.56 million) for new applications and offering tax allowances when upgrading energy efficiency, according to property consultancy firm Napier & Blakeley.

What about foreign investors and reits ?  

Foreign investors who own buildings in Australia are also subject to the new regulation including those using a managed investment trust (MIT) structure, a popular method that makes buyers eligible for tax benefits.  They will be subject to the mandatory energy disclosure rules if they sell or purchase a whole building, or let or sublet all or part of a building. If, however, they own only part of a building and wish to sell their stake, they do not need a NABERS rating.

 Foreign investors have been active buyers in Australia, despite global financial uncertainty, scooping up $1.7 billion of assets in the 12 months to June this year, and are responsible for 70 percent of the overall transactions in Australia.  Some property trusts, have already raised capital to beef up their balance sheets and to prepare for the new rules.

Dexus Group has launched a programme to undertake A$40 million worth of capital work to upgrade average portfolio NABERS energy rating from 3.3 stars to 4.5 stars by 2012.

GPT’s portfolio rating of NABERS Energy is 3.7 and it has committed to lift the rating to 4.5 in 2011, while other major office REITs have similar targets.

How rents, values will be affected ?

A U.S. study showed buildings with a green rating commanded rental rates that were roughly 3 percent higher per square foot than otherwise identical buildings. Selling prices of green buildings were about 16 percent higher, according to the study done last year by scholar Nils Kok of University of California, Berkeley, and others.

There have been no similar studies done in Australia yet.

“The big issues are around avoiding future risk of obsolescence, tenant attraction and retention, risk and adequate forecasting of capital expenditure,” said Mark Willers, senior valuer at CB Richard Ellis. Willers said A-grade and B-grade office buildings should generally be able to achieve a NABERS Energy rating of 3.5 to 4 stars by fine-tuning existing plant and systems but it could become costly if they aim for higher ratings.

“The ability of a building to achieve NABERS Energy ratings in excess of 4 stars will depend on its configuration and construction, and may require significant capital works,” he said. The government data shows the cost of upgrade from 2 to 3 NABERS star ratings could range from A$35-A$61 per square metre.

The green drive is likely to accelerate as government entities, which occupy about a third of Australian offices, have pledged to take up buildings with NABERS rating of 4.5 star or better for their offices by 2011.

The stock however of buildings with 4.5 stars and above remains scarce, representing about 11 percent of the overall national market, according to the government data.

By Eriko Amaha -  SYDNEY, Oct 11 (Reuters)