Author: Dan Hill, National Director- Commercial
At an institutional level, environmental, social and governance (ESG) factors are key considerations for industrial property investors. These include climate-related risks, sustainability features and practices, and the use of integrated property technology, such as AI-driven predictive maintenance.
Astute investors in sub-$30m industrial properties are monitoring these developments at the institutional level, as ESG attributes in this asset sub-class are increasingly being sought by lenders and tenants alike. They will also help future-proof investments in the context of governance, funding, regulatory and future capital expenditure requirements.
The demand for industrial assets with ESG attributes
ESG attributes are no longer a ‘nice to have’ in industrial assets. All major banks now require valuers to outline each asset’s ESG attributes and their impact on the property, as well as the potential risk exposures if ESG attributes are deficient.
For example, from an environmental perspective, valuers consider bushfire and flooding risks, Green Star ratings, as well as factors such as solar infrastructure, EV charging facilities, the use of recycled material, energy efficient internal fitouts, and rainwater recycling. Social factors considered include employee health and wellness (such as adequate amenities, indoor air quality and level of natural light) and access to public transport, other relevant infrastructure and amenities. From a governance perspective, we consider the quality of facility management, the use of property technology, and regulatory compliance requirements.
Tenants are also looking for industrial properties that have strong ESG credentials as that can help boost their brand, achieve their corporate sustainability targets and improve their operating cost benefits. In turn, this demand typically tightens yield. That yield, when combined with the potential to access green funding benefits and the better mid-long term valuation outlook, also makes these properties attractive to investors.
The upside of ESG-rich industrial assets
In the sub-$30m industrial asset class, there are clear valuation and cost benefits associated with properties featuring ESG attributes.
Comparisons between the operating costs of a ‘brown’ industrial asset and a greener one typically highlight the cost benefits offered to tenants or owner-occupiers by assets featuring ESG attributes. This enhancement of operational efficiency results in greater tenant retention and in turn valuation uplift.
The challenge in going green
While the benefits of ESG attributes in industrial properties are clear, the costs of achieving them can be prohibitive.
The combination of the high costs of construction and current low vacancy levels are constraining green upgrades for both new and existing sub-$30m industrial properties. Additionally, many assets in this category are held by owner-occupiers who are focused on the immediate needs of their businesses rather than the mid-long term value of their property.
In some cases, the repurposing of brown industrial assets has proved preferable to retrofitting them to achieve green credentials. There are countless examples of industrial properties in inner city locations being converted into residential or mixed use developments.
However, while ESG implementation can be costly, not doing so may prove even more expensive given the trajectory of future demand for industrial assets that offer green credentials.
The outlook
Across Australia, there’s increasing demand for green industrial buildings and investors are paying a premium for them. In turn, this demand is driving an increased pipeline of supply, which will eventually meet demand and lower the premium associated with green industrial buildings.
At that point, the gap between demand for green and brown buildings will widen further. While the cost challenges associated with rectification to green status are currently significant, they will only get harder when access to funding becomes limited due to declining brown asset values.
Dan Hill
National Director- Commercial
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DISCLAIMER
This article is produced by Opteon Property Group Pty Ltd. It is intended to provide general information in summary form on valuation related topics, current at the time of first publication. The contents do not constitute advice and should not be relied upon as such. Formal advice should be sought in particular matters. Opteon’s valuers are qualified, experienced and certified to provide market value valuations of your property. Opteon does not provide accounting, specialist tax or financial advice.
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