Combustible cladding and sustainability are two areas that have seen increased attention paid to technical due diligence (TDD) as a result of the changing legislative framework in Australia.
The November 2014 Lacrosse apartment buildings fire in Melbourne, along with the deadly structural fire at Grenfell Tower in London June 2017, have both influenced TDD requirements.
The legislative framework for combustible cladding that Australian state governments have developed in response to these is complicated, and the approach to addressing risk and remediation on applicable assets is therefore inconsistent between different states.
Building surveyors – or building consultants as they are more commonly known in Australia – giving TDD advice, therefore, need to consider the way both state legislation and the National Construction Code of Australia (NCC) affect the assessment of an asset.
To illustrate this, we can look at how TDD could be provided in relation to a commercial tower with a mixed use at street level in the central business district of Sydney, New South Wales (NSW).
The state's Building Products (Safety) Act 2017 No. 69, which took effect in August 2018, bans the use of aluminium composite panels (ACPs) with a core comprising more than 30% polyethylene in any external cladding, wall or insulation, or facade or rendered finish, for certain taller assets.
The ban can be enforced retrospectively, by means of a fire safety order issued by Fire and Rescue NSW, or a building rectification order from the local authority. But it is important to remember that the presence of ACPs on a building does not in itself mean that it is non-compliant or a safety hazard. The configuration of the cladding, the way it has been used and other fire safety measures installed in the building may also be relevant.
Meanwhile, the tower will also be subject to the Building Code of Australia (BCA), part of the NCC, which is equivalent to the UK's Building Regulations. This performance-based code sets the minimum required levels for the safety, health, amenity, accessibility and sustainability of certain buildings.
Part C1 of the code requires that external walls and common walls, including the facade covering, framing and insulation, must be non-combustible. This requirement is potentially further-reaching than the NSW-specific product ban.
Owners of assets to which the ban applies may therefore already be using a prohibited product, and thus run the risk of an enforcement notice for retrospective rectification. However, they may not be able to use a performance solution for this purpose because Fire and Rescue NSW does not generally support such approaches to combustible cladding. Wholesale replacement may therefore be the only option.
To prepare an accurate TDD report on an asset in NSW, you would in this example need to understand its external wall make-up to assess against the NCC, as well as obtaining laboratory test results that measure the polyethylene content to assess against the state's building products legislation. It is important, however, that any building consultant works within their expertise and TDD brief.
Test results are typically available from vendors as part of any such due diligence process in Australia if the presence of combustible cladding is suspected. In these circumstances, a building consultant will typically recommend what further advice should be sought, and from which specialist.
Typically, for a vendor TDD report on a relevant building, a facade consultant should provide a cladding report that includes laboratory testing results. Such a report should be requested from the vendor if you are acting for the purchaser.
This will inform:
In late 2018, owners of investment assets – most notably those in NSW, Queensland and Victoria – began to realise that combustible cladding risks were not going away.
They therefore needed to find capital they could spend to address new legislative requirements or increased insurance costs – or even to deal with the diminishing interest from tenants, who may rule out assets with combustible cladding when searching for premises. In many instances this capital expenditure was unplanned.
Yet forecasting the potential costs for such remediation has been fraught with difficulties for consultants, owners and contractors alike, given the different TDD requirements in each state, as well as the limited pool of contractors able to complete the works.
In early 2019, cladding replacement costs tended to comprise 50% for access, 30% for material and labour and 20% for professional and statutory fees. However, labour restrictions resulting from Australia's decision to close its borders during the pandemic, supply-chain disruption and unprecedented aluminium commodity price increases have seen cladding replacement costs rise by up to 30% in the past two years.
Works under management costs for cladding replacement projects are currently in the range of A$1,200–A$1,500 per square metre, and a 12-week lead time for materials is not uncommon. Many projects with complex access requirements, needing extensive subframe modifications or restricted construction programmes because of tenant requirements, can further increase costs and construction schedules.
Cladding removal can also be extremely noisy, causing vibrations through a structure. This means careful consideration is needed to stage works in occupied assets, which often limits working hours owing to the potential disruption to the tenant's quiet enjoyment.
As a consequence, where there is a known need to replace cladding on commercial assets, some new leases have in recent years been negotiated to include provision for the lessor to complete the works with more favourable conditions.
Meanwhile, although the market in Australia is not as well informed about sustainability as it is in the UK, conversations at due diligence phase are beginning to take this issue into account.
Historically, sustainability requirements tended to differ in scope depending on where the capital for the acquisition originated; investors from Europe would have more stringent sustainability criteria, for instance. But there is no doubt that green capital is now more consistently influencing the TDD process.
Typically, the base requirement met during TDD is a phase 1 environmental site assessment, also called a preliminary site investigation. This is effectively a non-intrusive, desktop review though, concerned with contamination, whether the site is on a flood plain or what refrigerants are used in any base-build mechanical services, and there are few inputs actually related to sustainability.
The building consultant is typically also expected to provide a summary of any building sustainability ratings, the National Australian Built Environment Rating System (NABERS) and Green Star, being the two most common in the country.
The past 18 months have however seen a marked increase in the need to coordinate specialists to advise on climate risk exposure, mitigation efforts and building resilience. These are almost certainly linked to the reporting requirements of the Financial Stability Board's Task Force on Climate-related Financial Disclosures, which are not mandatory in Australia at present, but are likely to become so in the next few years.
In most instances, a specialist consultant needs to be engaged to provide this advice, and as building consultants you are reminded to ensure that the appropriate appointment documentation is in place.
'There is no doubt that green capital is now more consistently influencing the TDD process'
Another incentive for more sustainable buildings is increased value. In 2021, Knight Frank's Active Capital Report 2021, for instance, assessed the effect of an energy rating of five or six stars under NABERS.
Looking at 300 commercial transactions, the research found that buildings thus rated attracted a premium of up to 17.9% on the sale price, compared to an 8.3% premium on lower-rated buildings.
In addition, there is now a larger pool of buyers and a broader leasing market for green buildings, reflecting an increasing preference for assets accredited as being more sustainable.
What this no doubt signals is that building consultants who provide TDD services will also need to better understand the somewhat confusing frameworks around carbon measurement, and the concepts of embodied and operational carbon.
The majority of TDD reporting carried out in Australia is led by, or involves, RICS-accredited building consultants, given that their competency in defect diagnosis or building pathology lends itself very well to this process.
While a number of building surveyors trained in the UK have successfully relocated to Australia, many have moved away from building consultancy to focus on project management.
When Australia closed its international borders during the pandemic this restricted the pool of building consultants even further. The country relies on consultant talent originating in the UK, as it lacks the same educational frameworks through university that lead to building surveying careers.
There is, however, a strong domestic network of chartered surveyors supporting all RICS members who do arrive, and many choose to do their APC here. If this is a route you are interested in, do reach out to RICS Oceania or members already based here for advice on the ever-changing Australian visa system, which needs to be navigated if you want to obtain long-term working rights.
'The country relies on consultant talent originating in the UK'
TDD requirements are evolving, but are integral to the commercial property transaction process in Australia.
While the national economy has demonstrated strong and sustained growth over the past three decades, it was like others buffeted by measures put in place to mitigate the health risks of the pandemic. Nevertheless, it has since shown its resilience and ability to rebound quickly.
Active participation from a wide range of cross-border investors reflects the status of Australia as a major global real-estate market that offers a safe haven and long-term growth potential, as evidenced by high rates of historic rental growth relative to other global economies.
While rising interest rates and current inflation increases pose a potential problem for capital growth in the near term, Australia's economic strengths and deep, liquid capital markets mean it will remain a preferred destination for global property investors. Chartered building surveyors will therefore continue to be part of the story and take a lead on TDD advice.