Australian offices face 'almost certain' drop in NABERS Energy ratings
Nearly 70 per cent of NABERS-rated office buildings are expected to see their energy rating drop over the next year due to an upgrade in the rating methodology, experts warn.
As commercial real estate assets, these office buildings will also face value reductions, and this is likely to affect both new and old buildings.
The buildings most at risk from the changes that come into effect next July are those that rely too heavily on energy consumption through natural gas.
The changes are expected to create havoc for property owners who will need to prove they are taking steps towards electrification to sidestep the ratings drop.
A NABERS Energy rating is compulsory whenever an office building larger than 1000 square metres is being sold or leased. NABERS provides a rating from one to six stars for energy efficiency. A six-star rating demonstrates market-leading performance.
However, Australia’s offices have been reportedly dragging their feet in the sustainability race, with figures last year revealing that just 23 per cent of buildings actually have a NABERS rating.
It comes as Melbourne’s office tower owners identified climate change as a key commercial property investment risk, with strong sustainability credentials and landlord willingness to agree to an electrification pathway for buildings as a “must-have” requirement for new tenants.
Despite this, 68 per cent – or 851 – of NABERS-rated office buildings across Australia still use gas despite an increase in renewable energy across the board, Knight Frank analysis found.
Commercial property buildings in the colder states – besides Tasmania, which has minimal gas infrastructure – will be the hardest hit by the NABERS Energy rating change due to their higher percentage of gas use, the data revealed.
David Bullock, Knight Frank’s director of ESG, said 11 per cent – or 96 – of those 851 buildings had a rated area of 10,000 square metres or more. They consumed more than 50 per cent of energy on-site as gas, representing 2.1 million square metres in rated office space.
“This highlights that there still remain a number of larger assets where electrification remains an opportunity and the challenge still exists in these buildings, especially in the cold climate markets of Victoria and ACT, for the removal, or reduction, of gas,” he said.
The ACT is expected to have the highest proportion of NABERS-rated office buildings impacted by the energy rating change at a rate of 92 per cent, followed closely by Victoria at 90 per cent, South Australia at 89 per cent, and NSW at 72 per cent, according to Knight Frank.
Due to its balmy conditions, the Northern Territory is expected to be the least affected, with only five per cent of NABERS-rated properties reliant on gas.
Jenine Cranston, head of ESG at Knight Frank, said the looming changes meant buildings with higher gas consumption would soon deliver lower energy rating outcomes than buildings that used little or no gas.
“If your building is still using gas, it may receive a reduced NABERS Energy rating when rated after 1 July 2025,” she said.
“For a building using gas for heating, the reduction in the NABERS Energy rating is likely to be around 0.5 stars from 2025 and one star from 2030. If a building uses gas only for domestic hot water, the impact will normally be minimal.
“If a building using a significant amount of gas is only just achieving a particular rating now, its rating will almost certainly drop after the algorithm adjustment in 2025, assuming other factors remain constant.
“Unfortunately for building owners, a reduction in energy rating may also lead to a value reduction for the asset, with ESG-credentialed assets the most in demand among buyers.”
Cranston said it was likely the changes would affect both old and new buildings and urged building owners to act now to see how changes might affect them.
Many older office towers have fossil-fuel-powered heating, and their cooling systems are outdated. Their low energy-efficient ratings are likely to see them continue to lose energy-efficient hungry tenants if updates aren’t addressed.
“Only five years ago, new buildings didn’t have to be electrified, so we expect there will be a wide range of buildings across a wide size range that will be impacted,” she said.
“ESG is a fast-moving space, and it can be hard for property owners to understand and keep up with the complexities, so our best advice is to seek expert help.
“The best thing to do to future-proof your property in terms of ESG is to put an electrification plan in place and start taking steps towards achieving electrification of your building.”
Cranston said only having electrification plans in place for buildings – without steps having been taken to achieve it – won’t be taken into account in the new NABERS Energy ratings next year. The ratings are conducted on performance over the previous 12 months.
“The office sector is faced with multiple challenges to electrification, including declining values, energy transition costs, evolving technology and growing refurbishment costs.
“However, the opportunities to reduce carbon emissions and evolve with the changing NABERS algorithm must be met head on,” she added.
Among the buildings taking charge of their sustainability credentials are two in Melbourne.
The largest commercial solar panel system in Australia is located at 101 Collins Street, which recently achieved a four-star NABERS Energy rating.
Another office tower in Melbourne’s CBD, 500 Collins Street, also remains at the forefront of environmental design and technology. It became the first existing building in Australia to achieve WELL Certification at the Platinum level despite being 48 years old at the time. It also boasts a five-star Green Star Design rating.
