To BEEC or not to BEEC: That is the question

Introduction

Earlier this year, The Department of the Environment and Energy engaged The Centre for International Economics (CIE) to undertake an independent review of the Commercial Building Disclosure (CBD) Program and its enabling legislation - the Building Energy Efficiency Disclosure (BEED) Act 2010 (Cth) (BEED Act).

CIE’s Issues Paper (Issues Paper) focused on a number of specific reference points and invited written and oral submissions over the course of the year. With a final report due imminently, in this update, we will consider one of the reference points addressed in the Issues Paper to expand the operation of the CBD Program to include other high energy-using classes of buildings, such as shopping centres and hotels.

Overview of the current CBD Program

The CBD Program operates to rate and regulate commercial office buildings with respect to their energy and has evolved over a number of years in response to the Australian Government’s commitment to reduce greenhouse gas emissions. Currently, the objective of the CBD Program is to improve the energy efficiency of Australia's large office buildings and to ensure prospective buyers and tenants are informed.¹

Briefly, the CBD Program requires the provision of information in the form of a Building Energy Efficiency Certificate (BEEC) to be made available to prospective tenants and purchasers of a particular property (which also must be included in all advertising of the property). At this time, the BEED Act applies to commercial office space where more than 1,000 square metres is offered for lease or sale. There are some types of buildings exempt from this requirement – for example, new buildings where a certificate of occupancy (or equivalent) has either not yet been issued or was issued less than two years earlier.²

A BEEC includes:

• a NABERs star rating, which provides information on energy use, greenhouse gas emissions and a benchmark of how energy use compares to similar buildings in similar climatic locations; and
• a lighting efficiency of the tenanted area through a Tenancy Lighting Assessment. This provides a measure of the energy required to light each of the areas of a building.³

There are substantial penalties involved for non-compliance with the BEEC Act.⁴

Expansion of the CBD Program to shopping centres

Publicly available responses to the Issues Paper indicate there is overwhelming support for the extension of the CBD Program to shopping centres. As identified by the Energy Efficiency Council in its submissions on the Issues Paper, “the sector is ripe for being covered by the CBD Program” as many of the large institutional landlords in Australia are also owners of commercial office buildings currently participating in the CBD Program. Statistics in 2017 indicated that over 34% of the 588 shopping centres over 120,000 sqm already had voluntary NABERS ratings.⁵

Certainly, shopping centres in Australia are largely dominated by institutional landlords who would be keen to reap the benefits that involvement in the CBD Program would return - like the ability to drive better cost and comfort outcomes for its tenants, the capability to attract higher rental and the means to potentially use the ratings to entice more sophisticated tenants. However, the market is also comprised of a number of smaller operators who would be required to invest in their developments to install the performance-based infrastructure required to participate in the CBD Program.

It is not clear from the Issues Paper whether the proposed changes are intended to apply to all shopping centres or whether the application will depend on the size of the shopping centre. To follow the current regime would see shopping centres of 1,000 sqm or more involved, which would most certainly apply to the smaller operators. Training and education for the smaller players is an essential consideration for the Government should the CBD Program expand to shopping centres.

Given the interest in this area in recent times, we already see many leases including specific obligations on landlords and tenants with respect to energy usage (for example), so as a general comment, for some retailers, progression to participation in the CBD Program may not change day to day operations.

That said, from a retailer’s perspective, there might be concern that the additional costs associated with participation in the CBD Program would be passed on to tenants under the outgoings provisions in the lease. Not to mention the obligation on retailers to themselves monitor and report back to the landlord is an additional burden, and potentially costly, in an already unstable retail market.

Just last month, we saw a prominent UK based retailer enter administration, closing all of its Australian stores. It is certainly not a suitable time for further complexities and costs in the retail market if we want to see the already struggling retailers continuing to keep shopfronts in Australian shopping centres.

Expansion of the CBD Program to Hotels

As mentioned by Tourism Accommodation Australia in its submissions on the Issues Paper (TAA Submissions) “Hotels are high risk investments with extensive regulatory compliance measures, high operating costs and low margins”. Those hotels which in recent times have been required to install ID scanning devices to comply with legislative requirements have already been put to considerable cost. There is a risk that the expansion of the CBD Program to hotels would add yet another layer of administrative burden and expense.

Hotel accommodation in Australia:

• is owned or operated by a diverse range of investors. While large hotel chains may be able to absorb the additional time and cost involved in complying with the CBD Program, this could prove problematic for small ‘mum and dad’ investors. The TAA Submissions note that hotels, in comparison to commercial buildings, have few institutional owners. One of the questions that CIE is seeking feedback on in relation to hotels is what minimum thresholds should apply and what is the most appropriate trigger for a BEEC. The trigger which applies to office space of the offer of a sale or lease of an area of more than 1,000m2 may not be appropriate for small scale investors and could potentially add barriers to investing in hotels; and
• covers a wide range of accommodation types. A pub in the Australian outback is a vastly different enterprise from a major hotel in a capital city. As noted in the TAA Submissions, “operations vary considerably – number of workers; number of rooms and thus visitors; guest expectations; types of operations – accommodation only; accommodation with restaurants and/or conference facilities and/or spa – all have different levels of impact on energy usage, irrespective of energy use initiatives put in place”. This would make it difficult to apply an environmental rating scheme consistently across the sector and could create “an unlevel playing field”.

As we see our Australian ecotourism continue to grow, an environmental star rating could assist an ever-increasing number of environmentally conscious guests in their selection of accommodation. There are those, however, who fear that an energy-rating regime could be confused by customers with the well-established star rating system for hotels.

If it decides to extend the CBD Program to hotels and shopping centres, the Government in determining the thresholds and triggers to apply will need to find a happy balance between any potential commercial impacts on the hotel industry and on landlords and tenants in the retail market, as against the overall the objective of the CBD Program to improve the energy efficiency of Australia's buildings.