How landlords can add an extra “tenant” to their commercial properties. Photo: Rethink Renewables
Landlords can now earn an additional passive income by making one tweak to their commercial properties.
Commercial and industrial rooftops in Australia have long been a wasted space that, amid rising energy costs, have left many wondering why solar panels weren’t atop every one.
Rethink Renewables director Paul Harmsworth is among those addressing the challenge, having developed a model that supports investors in transitioning to renewable energy while creating an additional passive income stream through their tenants.
Two major barriers had prevented commercial landlords from taking the plunge historically.
“Selling electricity to another party in Australia requires a retail licence or an exemption from the energy regulator, even where no profit is made, and most landlords understandably have no appetite to become licensed energy businesses,” he said.
Additionally – besides doing their part for the environment – it was a big investment for landlords without getting much back.
A commercial property in Australia taking on solar panels. Photo: Supplied.
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“The products that did exist were built around a third party funding the system and selling the power to the tenant under its own licence, leaving the landlord providing the roof for little or nothing in return.”
Rethink Renewable manage solar assets for commercial properties, while the landlords involvement is investing the capital to get the return.
Mr Harmsworth said the easiest way to think about it was like the landlord was managing an additional tenancy – therefore getting an extra income.
As energy prices remain high, Rethink Renewable presents an opportunity for landlords to onsell energy to tenants at a discount, benefiting both parties.
The numbers: How much it costs.
Mr Harmsworth said a well-matched site can expect roughly $29,000 a year of net income before tax on every $100,000 invested, with larger systems on higher-consuming sites producing more, and sites with modest daytime consumption producing less.
Most commercial landlords can expect between a 20-30 per cent cash-on-cash return once panel degradation, vacancy periods and unused energy are allowed for, and that’s still typically two to four times what a landlord sees per dollar invested in the property itself, he added.
Paul Harmsworth, director of Rethink Renewables. Photo: Supplied.
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“A $100,000 system generating 155,000kWh a year costs about $220,000 to own over 20 years including fees, which works out at 7.1 cents a kilowatt hour. Compare that with a typical commercial grid rate of 25 cents: if the landlord offers the tenant a 10 per cent discount, the tenant pays 22.5 cents, still well below their grid rate, and the landlord’s annual position becomes $34,875 of income less $6,000 of fees, leaving $28,875 on $100,000 invested, a cash return approaching 29 per cent in that best case.
“Our Townsville, Coolum and Erskine Park case studies show cash-on-cash returns of 21 per cent, 24 per cent and 31 per cent respectively, all within that expected band, across very different property types and system sizes,” Mr Harmsworth said.
Additionally, landlords don’t need to fund the system with cash, the common routes are asset finance secured against the equipment, sustainability-linked or green loans, and infrastructure loans tied to the property itself.
“Financing doesn’t blunt the returns much either: even at today’s higher costs of capital, say 8 per cent, the net return after financing typically lands anywhere between 8 per cent and more than 20 per cent depending on the structure and the term,” Mr Harmsworth said.
Regional areas were proving particularly fruitful due to expensive energy prices. Photo: Rethink Renawables
“Unlike property, where an 8 per cent cost of debt outruns most rental yields, the solar income carries the debt comfortably, which makes the roof a far better leveraging proposition than the building it sits on.”
“Our Townsville and Coolum case studies were both financed at 100 per cent, at 6.9 per cent and 7 per cent respectively, and still returned 14.1 per cent and 17 per cent net of finance costs.”
Who does this suit?
The model will suit most commercial and industrial properties, and works particularly well where tenants consume a lot of power during daylight hours, he added.
Neighbourhood shopping centres, grocery stores and retail spaces that use high airconditioning are stand out cases.
“The more energy a tenant uses, the more the landlord sells,” Mr Harmsworth said.
“Regional properties are also strong candidates, since network charges are typically higher there, which raises the grid rate the solar energy is competing against and improves both the landlord’s income and the tenant’s savings.”
