Newsletter
Summer 2012 Edition
www.palladium.net.au | ph: (02) 9432 7866 | 133 Alexander Street, Crow's Nest NSW, 2065
Property Advisory  |  Development Management  |  Transaction Management
 
Dear [FirstName1,fallback=Subscriber],

Please find for your information, an overview of several current, key issues affecting property development and investment across a number of property categories.
 
Mandatory Disclosure – Risks and Opportunities
The Building Energy Efficiency Disclosure Act 2010 now requires (with few exceptions)  that owners and lessors of office space greater than 2,000m2 provide potential buyers and tenants with a building energy efficiency rating during sale or lease advertising and  negotiations. This allows prospective purchasers and tenants to compare the significant impact of energy efficiency of alternative buildings or premises. Building energy efficiency is becoming an increasingly important consideration for prospective tenants and buyers, given that carbon pricing legislation has passed and consumer electricity prices were forecast by the Commonwealth Treasury in July 2011 to increase by a nationwide average of ten per cent in 2012-13.

A transitional period implemented in late 2010 which required vendors and lessors of office space greater than 2,000m2 in size to provide a National Australian Built Environment Rating System (NABERS) energy base or whole building rating during negotiations. NABERS is a performance based ratings system which measures the environmental impact of the operation of a building.
However, this initial transitional period expired in November 2011. Lessors and vendors are now required to provide a Building Energy Efficiency Certificate (BEEC). This comprises of a NABERS base building rating, an assessment of tenancy lighting in the area of the building and general energy efficiency information. The assessment of tenancy lighting involves calculation of power density per square metre and an assessment of the effectiveness of lighting control systems.

Failure to comply with the Act attracts strict penalties of up to $110,000 imposed on the first day and of up to $11,000 for each subsequent day of failure to comply.

However, significant opportunities have arisen and enable asset owners to analyse their tenant target market and upgrade the energy (and water) efficiency systems to ensure high tenant retention rates, increased net income and higher asset values. Such energy upgrades have become significantly cheaper over the past four years as leading private and institutional property owners have capitalised of the benefits and emerging technologies.
 
Environmental Upgrade Agreements
Environmental Upgrade Agreements (EUA’s) are an innovative new form of financing  energy and water efficient upgrades allowing, from the reinvestment of the savings from energy and water savings, building owners to increase the value of their property assets and tenants reduced utilities charges. This partnership between select council, financiers, building owners and tenants  reduces the building outgoing charges and lifting the green credentials and marketability of the asset through lessening  the impact on the environment.

EUA’s facilitate a mechanism to fund between $250,000 and $10million of comprehensive building, lighting, ventilation/air conditioning, facade improvements, transportation , building management systems , co and tri-generation facilities and water efficiency upgrades. Selected Council partnership offers sustainable  upgrades and refurbishments are 100% funded over longer periods that extend to office, industrial, shopping centres hotels and community property assets.

The key advantage of EUA’s is that both tenants and building owners derive benefit. Building owners receive fully funded capital expenditure for the upgrade resulting in higher tenant retention rates and appreciate assets values. Tenants benefit from a reduction in energy and water charges,  whilst carbon emissions are significantly reduced.

Common examples include upgrades to more energy efficient lighting, installation of more efficient air conditioning and heating systems, glazing and façade treatment and installation of renewable energy generation equipment.
 
Sydney Residential
Market Overview
The Sydney residential market continues to buck trends evident in other capital cities around Australia. Sydney property prices have remained stable over the last 12 months, while other Australian capital cities, with the exception of Canberra, have seen property values slide considerably.

The outlook for the Sydney Residential Market is positive despite the current economic climate and concerns that Sydney residential property continues to top the unaffordability index on a global median household income / median price basis. Broad consensus is for fair growth in the Sydney residential market over the next two to three years, fuelled by predicted interest rate cuts over the next 12 months, Sydney’s residential housing shortage and the relatively strong position of the Australian economy.

The Sydney residential rental market has remained extremely tight, with survey data released by the Real Estate Institute of Australia in December 2011 estimating total average vacancy rates in Sydney of just 1.6%.  These higher rents resulting from historically low vacancy  levels anticipated interest rates cuts and low unemployment supports rising property prices.
 
Planning Reform in NSW –
New Development Opportunities
Local Environment Plans (LEPs) are the key planning instruments which govern land use within Local Government Areas in NSW. These are prepared by Local Governments and impose standards to control development such as site zoning, site coverage and floor space ratios. LEPs  reserve land  for public and transport purposes, control advertising and protect trees and vegetation.

In 2006, the NSW Department of Planning developed a standard format for LEPs which must eventually be adopted by all local governments in NSW. One standard form LEP is required to replace all existing LEPs in each Local Government Area. As a result, the NSW Department of Planning aims to reduce the number of LEPs to around 150.

Some 67 Local Governments across the state have been identified as priority Local Government Areas, meaning they were required to migrate across to the standard LEP form by June of 2011. Priority Local Government Areas in the Sydney Metropolitan region include Sydney City, North Sydney, Ryde, Parramatta, Waverly and Penrith to name a few.

This major overhaul was brought about in order to simplify and streamline the planning system for residents, businesses and councils by introducing a consistent approach to land use planning controls across NSW.

The NSW Department of Planning has recognised that Sydney is undergoing rapid population growth, and has forecast population to grow to six million people by 2036. To cope with this expansion, additional housing, infrastructure, community and commercial facilities must be constructed. As new LEPs are drafted, local governments have in many cases rezoned significant parcels of land within their Local Government Areas.

This has created significant opportunities for development which was previously not possible due to restrictive zoning policy, in order to meet the demands brought about by Sydney’s expansion. Astute developers have secured sites early in the draft LEP review process and are analysing highest and best use , carrying out technical due diligence, lining up potential tenants and securing finance in order to take full advantage of such opportunities ahead of their competitors on gazettal of new LEPs.
 
Funding Challenges - Effects of the European Sovereign Debt Crisis
The ongoing sovereign debt crisis in Europe continues to make headlines around the world. With Greece, Portugal and Ireland all requiring bailouts totalling hundreds of billions of Euros and Italy showing signs of default, the outlook for the EU remains bleak. The two European powerhouses are struggling with France suffering a credit rate downgrade and Germany a significant drop in export volumes as the US struggles to avoid a double dip recession. As the future of the European economy hangs in the balance, there are a number of funding and other implications for property markets and development in Australia.

The Eurozone crisis has had a marked effect on confidence worldwide. Survey results released in December of 2011 reveal that business confidence in Australia is slipping, as are consumer confidence levels. The Reserve Bank of Australia (RBA) is wary of the effects flowing from an absence of confidence on the domestic economy. The RBA warned in December of 2011 that precautionary behaviour by firms and households will increase the likelihood of slowing economic growth.

Recent events in Europe have had an impact on the willingness of banks to provide credit to businesses. Surveys have shown that the number of businesses experiencing difficulty in gaining access to finance has markedly increased. This shortage of funding extends to the financing of development projects, with banks often reluctant to provide funding unless significant pre-leasing or pre sales have taken place. As a result, lenders need to understand their funding risk and developers will be well
advised in undertaking significant property market research and technical due diligence prior to seeking funding for acquisition and development. Where asset owners and developers meet lenders increased requirements, and as the Reserve Bank eases monetary policy, an increasing number of projects will become financially viable. Successfully securing project funding will provide significant advantage from a supply/demand perspective, resulting from competing projects unable to secure appropriate funding.
With all the uncertainty and risk emanating from Europe and the weakened state of the U.S. economy, it is easy to forget that there are a multitude of successful projects going ahead of all sizes and descriptions and numerous opportunities do exist.

However significant industry confidence flows from the ‘green light’ given to large NSW projects including Central Park on the old Carlton Brewery site on Broadway, Barangaroo and Eight Chifley Square in the Sydney CBD. The $8billion Dollar redevelopment of Green Square, four kilometres to the south of the Sydney CBD continues to go ahead following many years of delay. The $200million redevelopment of the GPT Wollongong Central shopping centre has just been approved and construction is scheduled to commence providing a likely boast for the Illawarra. Located just south of Newcastle, the Charlestown Square shopping centre has just undergone a $470m overhaul.
 
Services we offer:
Property Advisory (Due Diligence) – We listen carefully to our clients’ needs and utilise our extensive property experience, expertise and industry network to provide strategic advice based on comprehensive investigation and analysis.

Development Management
- During the development phase, we ensure targets are achieved through rigorous ‘hands-on’ management, attention to detail and continual client liaison. This comprises acting on behalf of the developer/asset owner to best secure a result by devising and implementing strategies, and diligent execution of the action plan.

Transaction Management (Acquisition, Pre Commitments, Leasing and Disposals) - We research, identify and analyse suitable sites to suit the acquisition brief. To ensure the best result Palladium will also review rental/sales evidence and evaluate competing transactions. We will also structure and manage site disposals, co-ordinate and direct the tender, leasing and sales process.
 
Contact:
For further information on how best to benefit from the current changes and trends, contact Phillip Hoare (Director), Palladium Property on 02 9432 7888

Disclaimer:
The information contained in this newsletter is understood to be accurate and is based on sources deemed reliable. Any comment and analysis is of a general nature only and should not be interpreted to provide any form of guarantee or project financial returns as regards the potential of any property asset class, geographical region or particular project. Investors should rely on their own investigations and due diligence prior to making any acquisition, divestment or development decisions.
 
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