Lack of Capital post GFC has lead to a significant neglect of R&M and Capex spend.

Having worked on property due diligence valued over $10B since the GFC, Napier & Blakeley have seen only nominal spend on upkeep compared with previous years.

Risk of Non-Compliance (i)

During this period the increasing trend has been a notable reduction of Repair and Maintenance (R&M) and Capital Expenditure (Capex)  budgets. Whilst this strategy may have been necessary in some circumstances e.g. postponement of non-essential Capex, we have found too commonly evidence of non-compliance regarding statutory maintenance such as testing, auditing and reporting of essential safety measures and fire safety systems.

Reduced Life Expectancy and Premature Capex 

Recent technical due diligence and condition assessments have also found that the lack of R&M and Capex budgets for economic life driven plant and equipment overhauls and refurbishments has resulted in increased short and medium term Capex.

To put this in context, without appropriate R&M, major plant items may have an economic expected life of (say) 25 years, however, the reduction or removal of maintenance can result in a major shortfall in expected life to around 15 years.

The Reaction

Astute purchasers have become aware of this risk and look for these patterns in their technical due diligence reporting to ensure that appropriate Capex costs are factored into the purchase price to account for a vendor’s R&M expenditure shortfalls.

Condition assessments, maintenance reviews, energy assessments and risk weighted strategic Capex forecasts have become 2010’s essential tools for good asset and facility management and sustainable property solutions.

Risk of Non-Compliance (ii)

Legislation requires that most commercial office property will be required to have a formal energy performance rating in the next few years and many will require this imminently or in the next few months.

This Legislation has caught most by surprise.

For purchasers and owners it is now important to understand where a property currently sits from a formally rated energy performance perspective.

It is also important to understand how the rating can be maintained at the same level over a period of time, and how it can be strategically and cost effectively improved to avoid future obsolescence.

The Building Energy Efficiency Disclosure Act 2010 is on the cusp of taking effect. The transitional provisions (1 November 2010 to 30 October 2011) require the disclosure of a building’s energy performance through a NABERS Energy base or whole building rating, for all commercial office property with a net lettable area of 2,000m² or more that is offered for sale or lease. However, with only 388 commercial office buildings registered nationally to date, it would seem the message may not have reached all concerned parties with property interests that fall under the Act’s disclosure requirements.

Anxious Vendors

With fines in excess of $110,000 for breaches of the Act’s obligations; including advertising the property for sale or lease, after 1 November 2010 without an appropriate NABERS Energy rating, there is significant anxiety in the market place.

The latest information from the Department of Climate Change and Energy Efficiency (DCCEE) will surely increase anxiety levels, as they have confirmed that neither exemptions nor extensions will be granted for lack of knowledge or where assessments are currently underway but not yet completed.

It will be interesting to see how owners, selling and leasing agents and DCCEE react.

Astute Purchasers

The story doesn’t end once the rating has been achieved. Purchasers want to know about the processes and procedures that owners have in place, the potential risks of maintaining the rating at the current level and what plans are in place, or could be implemented, to improve the rating, perhaps strategically in line with planned Capex or future lease expiries. Such initiatives are considered in terms of funding opportunities, reduced energy costs, pay back periods and commercial outcomes.

For more information on Technical Due Diligence, Capex Forecasts, NABERS Ratings and Sustainable Property Solutions contact Napier & Blakeley.

NSW / ACT / WA / NZ  -  Alastair Walker  -  02 9299 1899
VIC /  SA  / TAS  -  Peter Frith, Rob Howells -  03 9915 6300

Concrete has been the main stay of building construction for generations. Today, traditional reinforced concrete is an integral and important component of building structures. It usually takes the form of footings in ground, slabs on ground, columns and suspended slabs.

Concrete however, is not the perfect substance. As such it can suffer from defects. These defects can have a huge impact on the appearance, capital expenditure, maintenance costs, safety and effective life of the total structure.

What then are the typical forms of concrete defects? Some of the more common defects can be categorised as follows:- 

• Structural design inadequacies – distortion, bending cracks, deflection, shear cracks, impact damage temperature change cracks, abrasion, torsion cracks and erosion.
• Environmental causes – weathering/staining, biological growth, bacteriological attack, efflorescence (lime leaching), freeze-thaw damage and fire damage
• Aggregate properties – aggregate swelling/shrinkage/softening, alkali-silica reaction and sulphide staining/spalling.
• Chemical attack – sulphates, chlorides, acids and salt weathering.
• Reinforcement corrosion – cracking, spalling and de-lamination 
• Concrete Cancer – cracking of the concrete caused by the corrosion of steel reinforcement in concrete structures

These defects are a significant worldwide problem and cause multi-billion dollar losses to infrastructure and building owners annually.

Reasons for the rectification of concrete defects can range from purely subjective (the aesthetics); to preventive (to prevent additional damage); to structural (preventing partial or complete failure); to safety (avoiding impact from falling debris).

As evidenced by the recent traffic disruption caused by structural cracking on the Riverside Expressway in Brisbane, one of Australia’s busiest stretches of road, the consequences (time, distraction and expense) of cracking concrete can be severe.

What then is the solution to problems caused by cracking concrete? The type of concrete defect rectification varies with respect to a number of factors: budgetary constraints, time limitations, weather conditions, and the requirement for specialised techniques.

In the specific case of concrete cancer, cracked concrete is removed followed by cleaning, treating and replacing any rust affected steel. The area is then repaired to the original concrete profile using cement mortar, epoxy mortar or concrete. This depends on the size of the damage and the structural requirement. Cracks are repaired using suitable epoxies, special mortars and injection techniques

While the rectification processes are usually expensive and time consuming, they are nevertheless an important step to take. Cracked concrete can have severe consequences, and if remain unchecked, associated costs can escalate significantly from both a repair, and damage control perspective.

Since the 1960s, there have been numerous, high profile incidents of ‘spontaneous” failure of toughened glass in building facades. In some cases, glass has been known to simply ‘pop’ out of high-rise building windows and fall onto the streets below  Why does this happen? The cause lies within the makeup of the glass itself.

Nickel sulphide is a rare and unintended inclusion in the production of glass panels. However, the presence of nickel sulphide can be a problematic one. This is due to what is technically called, ‘delayed transformation’.

For those interested in technical detail, these follow:

Nickel sulphide crystals can take one of two forms. At high temperatures, a dense crystal is present. At lower temperatures, a less dense crystal is present. Provided the transition from high to low temperature (ie. cooling) is gradual, the crystal can move between forms without problem.

For example, in ordinary annealed glass, the crystals do not cause problems because the cooling process occurs slowly during manufacture.

However, during the production of glass for use in high rise buildings, a very fast cooling process is used. This process in necessary to create the toughened glass that is capable of withstanding exposure to strong winds.

The problem begins when the glass is cooled rapidly during the toughening process. This rapid cooling process often fails to cool the nickel sulphide crystals. So the nickel sulphide remains trapped in its high temperature form. However, the story doesn’t necessarily stop there. Sometimes, years later, the crystals may spontaneously start to transform and result in the glass breaking, causing the windows to shatter onto the streets below.

This problem still presents itself in glass manufactured today. If a significant amount of toughened glass is used, there is likely to be nickel sulphide inclusions. Statistically speaking, around two out of every 1000 toughened glass panels that are produced are likely to contain nickel sulphide inclusions.

The solution is not particularly feasible at this point in time. Existing detection methods are expensive and time consuming. The only way to detect and remove the potential for nickel sulphide is to examine each pane of glass individually. Each image must then be analysed for the detection of inclusions. Once these inclusions are detected the panes of glass are removed and the process of heat soaking begins. Heat soaking is a process first used in 1982 which heats up the glass pane enough to cause the inclusions to change phase altogether, thereby removing them. At this stage there is a 95% conversion rate for removing the inclusions via heat soaking. 

However, this is not the same as a 100% success rate, and it is indeed a time consuming and expensive process. While there are new developments within the industry that one day may overcome this problem, the shattering truth remains that when toughened glass is used, nickel sulphide inclusions are more likely than not to present themselves.

When undertaking due diligence work, we often identify instances in which owners have carried out quality refurbishments that include foyers, floors and ceilings.

While this certainly does help with the building’s maintenance and appearance, the refurbishment often overlooks a critical part of the equation: the air conditioning unit.

Air conditioners are a critical resource for buildings everywhere.  Why is it then that they are so often overlooked? Many building owners do not consider the air conditioning unit to be particularly important in terms of refurbishment. Some owners do not even consider that air conditioning units would ever need to be refurbished.  This however, is certainly not the case.

For most buildings, the air conditioning units were installed when the building was constructed. In some cases, this is as many as thirty years ago. As such, these air conditioning systems were designed to suit conditions relevant to the times when the building was originally constructed. For older buildings, this means that the air conditioning was designed to cater for factors that we consider common today such as computers, longer working hours and work station clusters.

Why is this a problem? Computers and body temperature each affect the general air flow required within a building. Consider a 10 storey building with a central air conditioning unit. It is likely that over a period of years, the number of employees within the building would have increased; the required electricity would have significantly increased; and the hours of work would most likely also be significantly greater.

In this instance, the air conditioning unit will have to work significantly harder than it did when it was first installed.

This can lead to several problems due to the increased workload, including increased maintenance due to, or to prevent failure, and increased running costs.

Effective, efficient air conditioning systems are a major consideration for employees and therefore benefits. So, a building owner must consider this issue when allocating funds for refurbishment, in order to achieve an optimal return on investment.

For many years, building owners have subscribed exclusively to the theory, if it aint broke, don’t fix it. This however can be an expensive mistake.

It is important to acknowledge that a building is an asset. As such, it needs to be protected and maintained to ensure that its value is not eroded.

To retain and attract tenants, your asset must be presented in the best possible condition, which in turn will maintain or increase its value.

Napier & Blakeley Building Consulting Manager, Nigel Towse says that if building maintenance is ignored, it can have significant consequences.

“There is a common misconception that buildings have long lives and only deteriorate gradually. This may be true for the more robust forms of structure. However even these can deteriorate rapidly with structural failure, environmental issues, chemical attack or the ingress of moisture.”

The health and well being of tenants is paramount in any leased asset and is heavily linked to how the building is maintained. There are basic, statutory obligations that require regular maintenance to be carried out to this end. In particular, cleaning, testing, and checking etc, of fire systems, boilers, lifts and hoists.

“By planning and carrying out your maintenance efficiently, you can minimise your capital expenditure. This will ensure that your asset is safe, economical, efficient, environmentally friendly, and retains its value,” says Towse.

Summer time is a great time to take stock of your business and a great time to think about and diarise some property housekeeping issues that quite often get overlooked in the bustle of normal day to day business.

However if you consider this now, you can plan to carry out some crucial housekeeping duties in January when business is traditionally quieter.

Some of the not so sexy but absolutely essential items to consider to maximise your return and minimise your cost and risk are as follows:

Property Replacement Insurance: given the sizeable increases in construction costs in recent times, have you considered whether your properties are correctly insured? Do you know what you are insuring: base building and / or fit out?

Capital Expenditure Planning: what items have you planned over the next calendar year? How will they be managed?

Maintenance: are your maintenance contracts up to date and appropriate? Are there any routine maintenance items that can be efficiently attended to in this quiet time?

Tax and asset updates: Is your base schedule correct? Have you carried out any upgrade works during the financial year to date for which you can claim either a tax write off or a future tax deduction?

Condition Audits: Do you need to create or update any condition surveys of your tenanted properties?

Tenancy Make Good: Do you have a schedule of lease expiries that will occur during the year? Are there any “repairing and make good” obligations that need to be planned with the tenant?

N&B can assist with all of the above to help you really enjoy your summer holiday.

A number of our articles have covered a variety of individual topics in isolation but in reality they’re all inextricably linked providing the platform for balance and maximum return from your property investments.

Our affordability index provides an amalgamation of a variety of property information to provide a balanced look at how your asset might perform over a period of time and how you can influence that performance.

Whether the investment is residential or non residential the same basics apply –

§          How much is it going to cost me

§          What risks are involved

§          What return will I secure

These questions then have multiple layers – how much is it going to cost me initially and in the short and long term, what kind of costs are they, capital, repairs and maintenance, refurbishment or compliance costs. What must I do legally, what must I spend to benefit and retain the tenant.

What risks are involved, physical, compliance or tenant retention, who ‘makes good’ the space at lease expiry.

How do I maximise and maintain my return and are there development opportunities that will add value to the property.

If you consider all of these questions in isolation they provide some useful information.

But only by considering all these issues at once you can create a clear picture of how your asset will perform over time, therefore providing certainty, clarity, sound information for a financier and a great platform for your accounts.

As an illustration, a commercial investment property is purchased for $5,250,000 the initial return is 8% with annual rental at $420,000. The property has 1,500m2 net lettable area and is ten years old.

A lease is in place for 5 years with fixed rental increases of 4% so at lease end – the possible value of the asset at 8% is $6,142,000.

Not a bad gain over five years if you can achieve it.

However, in addition to debt costs over the lease period, a building of this age will also have other costs associated with ownership over time and these need to be considered, planned and managed to keep the property aesthetically and functionally attractive beyond the current five year lease. No future lease – substantially less future value.

The pre acquisition due diligence study provides details of the risk factors associated with the property and notes that the related capital expenditure and repairs over five years is likely to be between $350,000 and $400,000 to carry out works such as Building Code compliance issues, replacement of floor coverings, services upgrades, painting and general upkeep.

The cost of capital works and repairs are tax deductible against income but obviously they also have a recurring cash flow impact.

Offset against ongoing costs of ownership are the tax deductions available for building allowance and plant depreciation deductions for the initial acquisition and again for additional capital expenditure throughout ownership. These deductions provide additional cash flow and after tax dollars to fund any upgrade works to the asset.

The affordability index captures all of the above information and allows you to:

§          Understand, plan and manage all costs associated with ownership.

§          Manage all risks associated with ownership.

§          Manage your true return proactively, by controlling cost and risk and capturing efficiently all available tax benefits.

So not only can you afford it, you can maintain a solid return as well with no surprises.