Why the public service may become the tipping point for a net zero property sector

Milestones to note

• 1 July 2024 - All Australian Federal Government property-related procurements will consider environmental credentials – Hotels with NABERS Energy ratings, all-electric office leases, renewable electricity procurement, car parking with EV charging facilities and energy-efficient data centre space.

• 1 July 2025 – Procurement specifications will require minimum 5.5 star base building NABERS Energy rated office space, minimum 5 star NABERS Energy rated data centre space, minimum 4 star NABERS Energy rated warehouse leases, mandatory Green Lease Schedule, and mandatory EV charging facilities.

• 1 July 2026 – Only all-electric office leases, setting NABERS energy rating as a minimum standard for hotel accommodation procurement.

The power of procurement to transform a market can be incredibly effective – just consider how the range of electric vehicles such as utes, vans and buses has grown due to purchasing decisions by fleet owners and operators. So, the announcement by the Australian Federal Government that a key element of its net zero operations strategy will involve choices around procuring office spaces, hotel accommodations, warehouse spaces and data centres for all its departments and agencies (excluding defence and security) is a Big Deal.

The Australian Government’s Australian Public Service (APS) Net Zero 2030 policy aims to demonstrate best practice ESG in its own operations and lead the market to respond by engaging in improvements to existing buildings. The strategy is also being led by a department that is more concerned with bottom lines than policy photo opportunities - the Department of Finance.

This is as much a numbers game as it is a matter of science-led targets for mitigating emissions and being more responsible about the consumption of resources including energy and water.

For a start, the scale of APS procurement is enormous - and the corresponding costs for energy are also significant. According to the Department of Finance’s Australian Government Office Occupancy Report, in 2022 there were:

• 645 federal government tenancies across Australia
• Over 3 million square meters of tenancy area
• Over $1.5 billion annual tenancy lease expenditure
• Over $50 million annual energy expenses
• Only 13% of tenancies currently meeting the mandatory 5.5 star NABERS Energy rating

Landlords should be paying attention now, as there is a significant tranche of leases – nearly 80 – due for renewal in 2024 and close to 65 the following year, in 2025, when base building 5.5 star NABERS energy rating becomes mandatory.

Why B-grade asset owners should act now

Under the APS Net Zero 2030 plan, from July 1, 2024, where entities are looking to lease any office space, all-electric buildings will be the preference. From 1 July the following year, 2025, for any tenancy over 1,000m2
of NLA, the property must hold a 5.5 Star NABERS or higher base building and tenancy rating.

There’s a major task ahead for the market, particularly for asset owners of B-grade and C-grade buildings leased by some of the lower-profile commonwealth entities, and for asset owners in regional areas, as the Commonwealth has a leased space footprint in every regional city around the nation. But high NABERS ratings and the appetite for electrification retrofits has to date largely been gaining traction in the capital city premium office sector, with some noteworthy exceptions.

Even the bean counters in the APS have noted the wide gap between their new requirements and current occupied space. According to the APS reporting, currently only a minority of 2022 current tenancies met the 5.5 Star benchmark – just 13.2 per cent of total tenancies.

And it’s not just about the office space

The government is also a major client of the hotel sector for business travel, and as a logistics and warehouse tenant, and is also one of the country’s largest customers for data centre services.

According to Department of Finance travel services statistics, there were over 750,000 hotel stays for 240,000 commonwealth government employees in FY 2017-18. It’s safe to say the number of hotel stays would have potentially increased to more than one million in alignment with the growth of APS staff numbers to over 350,000 commonwealth government employees in FY 2022-23.

The policy indicates that from mid this year, the NABERS rating of any hotel will be included in the information used by those making travel arrangements for federal staff, and there is the potential for having a rating to be mandatory – as of January 2024 there are just over 60 hotels nation-wide with NABERS ratings, the majority of them belonging to the large global operators that already recognise the market shift towards sustainability and the co-benefit for the hotel operator of lower energy costs.

Last year the commonwealth established a whole-of-government panel of providers for data centre services, setting strict requirements around power usage effectiveness (PUE) in the tender requirements. This is being extended to require all new data centre services – owned or leased – from 1 July 2025 must hold and retain a 5 Star NABERS Energy for Data Centres rating or an equivalent benchmark such as a PUE of 1.4 or less. That is only slightly less demanding than the current requirements in Singapore for a PUE of 1.3 or less for any proposed new data centre development.

Again, the market is going to have to move fast, as the NABERS data from January this year shows only 12 data centres hold a rating, and only one of those ratings is 5 Star NABERS Energy.

Similarly, there are only three warehouses in the entire nation that currently have a NABERS Energy rating, and it is expected that the major logistic asset owners will immediately begin assessing and rating their warehouse portfolio.

Expect a domino effect

Commonwealth government policy initiatives have always been a catalyst for state and local government actions. Examples include the flow-on effects of the energy efficiency in Government Operations policy in 2007, or the recent improvement in Commonwealth climate change policies, the uplift in Australia’s Paris Agreement Nationally-Determined Contributions and increased ambition in national and state emission reduction targets.

The positive here is that the pathways for auditing and improving energy efficiency, and the pathways for asset electrification are complimentary and there is a growing pool of financial services looking to provide the necessary capital for net zero asset pathways and enabling works, including sustainability-linked loans.

These building performance improvement works also increase long-term asset value and deliver outcomes for asset owner progress towards net zero, as a tenant’s emissions are a significant part of asset owner Scope 3 emissions.

Overall, the APS net zero momentum will be a force for good to transform parts of the Australian property sector that have to date proven more challenging to engage in terms of sustainability improvements.