From brown to green - retrofitting Australia’s real estate

With the built environment accounting for nearly a fifth of Australia’s greenhouse gas (GHG) emissions,^[1] achieving the country’s 2030 emissions reduction target of 43% below 2005 levels^[2] will be impossible without significant action within the real estate sector. Whilst the transition to renewable energy has seen a decline in operational emissions, addressing embodied emissions generated by the construction process remains a challenge. A potential solution, both in Australia and overseas, is retrofitting existing “brown” buildings with green refurbishments to transform them into near-zero emitting, sustainable buildings.

EU taking the initiative

Europe is undoubtedly leading the way on decarbonising the built environment. In early 2024, the European Union released its revised Energy Performance of Buildings Directive (the Directive). The Directive aims to reduce GHG emissions in the building sector by at least 60% by 2030 compared to 2015 levels and achieve a fully decarbonised building stock by 2050.^[3]

With nearly 80% of buildings that will exist in 2050 already standing today,^[4] the Directive targets reducing emissions from the existing building stock. It seeks to achieve this by requiring EU member states to set a minimum energy performance standard which landlords must maintain in order to lease commercial properties. Landlords who fail to comply with the minimum standards risk being stranded with assets that they cannot lease without major renovations. Given the substantial cost difference between a complete rebuild and a retrofit, the Directive drives property owners to undertake renovations to improve the environmental performance of their buildings.

At the same time, lending institutions in the EU are increasingly using tools such as the Carbon Risk Real Estate Monitor to evaluate a building’s GHG emissions and energy consumption. Assets that fail to meet green energy benchmarks face higher interest rates, adding further financial headaches for non-compliant asset owners.

Institutional investors holding assets that do not meet minimum energy performance criteria are therefore turning to private capital to offload these assets, often at a discount. This has created a small but burgeoning market for assets requiring low-carbon refurbishment. Investors who purchase and retrofit these assets can see rental increases of between 10-30%, depending on the asset class.

The current position in Australia

The introduction of sustainability rating systems in Australia has begun to increase awareness of energy efficiency and may accelerate the industry towards retrofitting. Although not compulsory, rating systems such as the Green Building Council of Australia’s Green Star ratings are increasing transparency in the sector and driving market-demand for environmentally friendly buildings. Buildings with high Green Star ratings generally command higher rents than similar buildings with lower ratings, and lenders are offering lower interest rates on loans for properties and developments that attain high sustainability ratings.

Another nationwide scheme is the Commercial Building Disclosure Program (CBDP). The CBDP requires most sellers or lessors of commercial office space above 1,000 square metres to obtain a Building Energy Efficiency Certificate, which includes an energy rating provided by the National Australian Built Environment Rating System (NABERS), before they can sell or lease a building. To encourage new participation in New South Wales, the State Government has previously offered financial contributions to property owners to obtain their first NABERS rating and action plan.

Whilst there is presently no mandatory minimum energy performance standard required in Australia, developments in the retrofitting space are being seen in the private sector. In 2021, ISPT spent $160 million to retrofit a 44-year-old building located at 500 Bourke Street in Melbourne. The decision to redevelop the existing building rather than demolish and rebuild it saved an estimated 57,000 tonnes of carbon emissions and saved costs upwards of $300 million.^[5] In Sydney, builder-developer Built converted the historic Sub Station No. 164 to commercial office spaces. By reusing as much of the buildings’ original material as possible, the developer reduced the project’s upfront carbon footprint by 21%.^[6]

The future of green retrofits in Australia

Although progress in this area has been gradual, it is anticipated that by 2028 a minimum standard for embodied carbon will be introduced into the National Construction Code. Such a mandate will encourage the retrofitting of “brown” buildings to greener assets, helping to curb emissions generated during the construction phase. Requirements to measure (as opposed to minimise) and report embodied carbon when applying for development consent for most alterations, enlargements or extensions of existing buildings where the estimated development cost exceeds $10m are already in place in New South Wales. Data currently being collected will ultimately be used to inform any government or industry led embodied carbon minimum standards.

Further momentum in this space will hopefully come from the mandatory climate-related reporting regime under the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024 (Cth). From 1 July 2026, the thresholds for mandatory reporting will lower, expanding the number of entities required to disclose their GHG emissions and climate-related risks and opportunities. Owners, lessors and lessees of brown buildings will need to report on the climate vulnerability of their property, the financial cost of ongoing maintenance and the environmental impact of operational emissions as climate-related risks.

Conclusion

In today’s evolving regulatory landscape, owners and developers must navigate complex legal, regulatory, and planning challenges when undertaking retrofitting projects. Careful, strategic planning is essential to mitigate risks, ensure compliance with applicable laws, and manage potentially lengthy approval processes. While these hurdles may pose short-term challenges, green retrofits will ultimately enhance asset value, lower operating costs, and improve access to premium financing. Early movers in this space stand to benefit most, future-proofing their investments against increasing reporting requirements and regulations.