How to achieve an improved investment outcome when embarking on a sustainable refurbishment

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DR MIREK PIECHOWSKI from Meinhardt Australia reveals how an improved investment outcome can be achieved when embarking on a sustainable refurbishment.

Facilities managers have the potential to contribute to three key objectives facing real estate asset owners and managers: improving an asset’s value, improving an asset’s return and minimising risks associated with assets’ obsolescence and increasing energy costs.
A recent study (Hertzsch et al) illustrates the need for and benefits of a holistic approach to the real estate asset management (REAM) decision-making process. The methodology is based on assessing building sustainability upgrades within a life cycle investment strategy.
In practice, REAM decisions may be triggered by a variety of events, including equipment breakdown, upcoming lease renewal, end of useful life of a building component, purchase or sale of an asset and regulatory requirements. At this point, the asset owner or manager faces two decisions: how to act and when to act. The answers to both depend on the expected investment outcomes.
Choosing the right investment metric can also be complex. Jaffe and Sirmans (Jaffe and Sirmans, pp.30) have identified 23 distinct investment objectives, demonstrating the complexity of owners’ objectives and outcomes.
As with any decision-making process, access to quality data is critical, particularly when investment outcomes are influenced by a diverse set of variables, such as construction cost, operational performance, market conditions and revenue projections, cost of capital, taxation treatment, expected sustainability outcomes as measured by NABERS or Green Star rating, or sustainability premium.
The methodology referred to provides a framework to capture and integrate a variety of data to inform the investment decision process. While the facilities manager’s key considerations may be operational – with a focus on a building that works, and is efficient and low maintenance – these operational improvements have a direct impact on the building’s asset value, but may be sometimes overlooked in the life cycle considerations. In fact, facilities management and asset management are intrinsically linked and, by looking at both, building owners can better optimise the value of their refurbishment projects.

SUSTAINABLE REVAMPS’ POTENTIAL VALUE
At the recent Green Build Conference, it was reported that 42 percent of construction work in Australia over the next three years will consist of refurbishment and retrofitting work. The market demand for sustainability upgrades is already significant and growing (World Economic Forum Report).
Owners want to protect their asset value against obsolescence. But, equally, their hands, to a degree, are being forced. Buildings and equipment naturally come to the end of their service life and are more prone to failure. And, regulatory requirements, such as the Commercial Buildings Disclosure Act, are demanding energy efficiency improvements.
Commercial buildings are responsible for approximately 10 percent of Australia’s greenhouse gas emissions and those emissions grew by 87 percent between 1990 and 2006.
Energy cost savings on their own may not be enough to support a business case, but factor in the potential rental income increase – the more sensitive variable in life cycle analyses – and then sums are more likely to add up. The question then is: when should you act? Timing is essential to align improvements and maximise the benefits of any investment.
When this is combined with an oversimplified financial evaluation of outcomes – for example, payback periods for specific elements such as variable speed drives and building management systems (BMSs), a focus on energy cost reduction and the ignoring of natural life cycle components – then it is little wonder that refurbishment projects don’t always deliver the value they could.

Building upgrades

TIMING IS EVERYTHING
Research collaboration between the Faculty of Architecture, Building and Planning at the University of Melbourne and Meinhardt has looked to provide a more realistic evaluation of refurbishment options and life cycle investment strategies.
The study used a 21-level office building in Melbourne’s CBD that was built more than 20 years ago as the base model. Detailed energy simulation was then undertaken for seven options, including the base case, a case for an HVAC upgrade, four cases of façade improvements and a case combining a façade and HVAC upgrade. They were evaluated with regards to their corresponding NABERS rating and financial outcomes.
Both passive design and active design improvements were considered. Passive design initiatives included glazing design; for example, improving performance and reducing the glazed area, external shading and natural ventilation. The active design measures included upgrading the HVAC, the BMS and lighting controls, such as perimeter lighting. A lifecycle investment analysis was then carried out. This included measuring the before and after asset investment value of the building.
There were two main trigger points to activate investment: one based on commercial triggers arising, when the building’s major lease was up for renewal and the owner and tenant were in the negotiation period; and one based on lifecycle renewal, when the building components reached the end of their useful life. This created a second set of pressure points in relation to the timing of renewing major elements such as HVAC systems.
The research demonstrated that aligning the timing of a building refurbishment project with the renewal of building components could optimise and improve the investment outcomes. One case considered upgrading one year before the chiller was due to be at the end of its scheduled lifecycle; and, in the second case, the project was postponed for a year. Optimised timing of the investment improved the net present value (NPV) outcome by approximately 5 percent.
This clearly demonstrates the importance of facilities managers working collaboratively and communicating closely with asset managers with regards to building component lifecycles.

ECO UPGRADES JUSTIFIED
While a building services component replacement or upgrade can result in tangible operating cost savings, it typically addresses only the P&L aspect of an asset. What the research has shown is that a more comprehensive building upgrade, including the building façade, has the potential to improve both the P&L and the balance sheet of an asset by moving it up on the building grade scale.
This saw a NABERS rating improvement from a low three-star to a high four-and-a-half-star rating. The increase in rental revenue resulting from the building grade improvement can generate enough additional revenue to justify the increased capital expenditure by making the project NPV positive.
Working together to drive rent up and operational costs down provides clear, tangible justifications for upgrade expenditure.

References
Hertzsch E, Heywood C, Piechowski M, (2012), ‘A methodology for evaluating energy efficient office refurbishments as life cycle investments’, International Journal of Energy Sector Management, Vol. 6 Iss: 2 pp. 189-212
Jaffe, AJ and Sirmans, CF (1986), Fundamentals of Real Estate Investment, Prentice-Hall, Englewood Cliffs, NJ
World Economic Forum, (2011), A profitable and Resource Efficient Future: Catalysing Retrofit Finance and Investing in Commercial Real Estate, A Multistakeholder Position Report

Dr Mirek Piechowski is leader of sustainability, carbon and energy for Australia at Meinhardt Australia.

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