Australia is ahead of the curve when it comes to integrating sustainability into its real estate market. Peter Verwer, CEO of the Property Council of Australia, explains to Richard Lowe how so much progress is being made

During a busy MIPIM in 2009, Peter Verwer told IP Real Estate that the big question for the real estate industry was whether sustainability was a concept that had effectively "come and gone" with the financial crisis "or are we moving into sustainability 2.0?" More than two years later and the chief executive of the Property Council of Australia (PCA) has seen the topic develop and mature surprisingly quickly.

"It has evolved to the point where it's now hardwired into the decision-making process of institutional investors and managers," he says. The global financial crisis might have stolen some of the headlines, but Verwer says there has been "no let-up" during the recent period of market turmoil. "We're at a point now where it's unthinkable for any institutional investor, when designing a new building, not to benchmark it to a very high environmental standard," he adds.

In other words, "new buildings are a done deal" when it comes to sustainability in Australia. But the greater challenge that remains is what to do with the larger body of existing assets that need retrospective improvements. "There's no debate about the fact that they need to be designed to a high environmental performance," Verwer says. "The focus now is what to do with the existing stock, and to what extent government needs to provide a regulatory framework and incentives to promote the upgrading of existing buildings, and to what extent the private sector will take on a leadership role."

In some ways, Australia is the indicator for the future of sustainability in real estate. It has a highly institutionalised and transparent market, while political and regulatory developments have provided the necessary catalyst. Since we last spoke in 2009, PCA has negotiated with the Australian government to introduce a mandatory disclosure system for the environmental performance of all commercial space of more than 2,000m2 when sold or leased. "That will have an impact on the market, because potential purchasers and lessees will be able to add the environmental performance of the building into the overall assessment of their purchase," Verwer says.

The debate for institutional investors in Australia has also moved on from the need to future-proof portfolios from regulatory and market changes to identifying the link between sustainable performance and investment returns. "There is an evolving view and some evidence now - which there wasn't before - that there is a measurable financial dividend," Verwer says.

The latest body of evidence in this area comes from Investment Property Databank (IPD) which, in conjunction with the PCA produces a quarterly index for the Australian real estate market. At the end of May, IPD revealed data that seemed to suggest that sustainable prime properties, as rated by Australia's Green Star system, significantly outperformed a prime non-rated benchmark. The study found that the return spread between Green Star-rated buildings and non-rated buildings was approximately 340 basis points. Furthermore, Green Star-rated office buildings had lower yields, or cap rates, by an average of 30 basis points.

Verwer says these findings make for "stark" reading. "It's important to stress that this is actual performance," he says. "But it's also important not to confuse correlation with causality. It's not just that because the buildings have a high Green Star rating they have a high total return, or a firmer cap rate, or higher rents." He explains: "Investors who organise themselves to achieve higher environmental performance outcomes are more likely to be better managers. They're managing for the environment, but they are also managing to improve the overall performance of the buildings."

Preceding the IPD analysis was a study commissioned by PCA and conducted by consultancies Arup and Davis Langdon. It analysed three generic buildings types built in the 1980s and documented the return on investment from sustainable refurbishment. PCA has also worked together with Arup in producing its series of ‘existing buildings survival strategies' - six-step plans designed to help real estate owners navigate a pathway to upgrading their buildings. These will soon be available as an online tool.

But Verwer admits that it will continue to be a challenge for investors looking to make sustainable refurbishments and retrofits, because they need a clearer understanding of the financial payback they will achieve as a result. "It's all about the payback period," he says. "At some stage the investor needs to determine what the optimal retrofit strategy will be and this is where we immediately run into the issue of a payback."

He continues: "It's a big issue for us, and the answer is that there is a considerable gap. If owners are going to achieve a step change in the environmental performance of their buildings, then there is quite a long payback period and so some form of incentive is required."

PCA is currently talking with the Australian government about stepping into this breach in the form of a billion-dollar building retrofit tax break. "That's what we asked for and that's what they have promised us," Verwer says. "It's been budgeted for, but the entire methodology - how the money is allocated and how we get it, and who qualifies - is yet to be determined." PCA is also striving for the tax break to be extended to real estate investment trusts (REITs).

Australia looks set to remain as the space to watch for those charting the direction of the global sustainability drive in real estate. "I just can't emphasise enough the extentto which this is a mainstream issue for the property sector," Verwer adds. "There's a high level of collaboration between the various institutional and professional societies, like the architects and the engineers and the trade bodies, such as ourselves; the environmental groups, the Australian Conservation Foundation. There is a very strong mandate to continue the process of lifting the bar."