Rupert Clarke
CEO, Hermes Fund Managers

Over the past few years the rise in interest in sustainable real estate has been quite phenomenal and as Chief Executive Officer of Hermes Fund Managers I remain as committed as ever to our Responsible Property Investment (RPI) agenda in the Hermes Real Estate business.

An area of investment which was, until quite recently, considered peripheral at best is now a core consideration in every area of real estate investment activity as it becomes clear to the wider real estate market that the sustainability profile of a building will have an impact on its investment value. It is too early to tell by how much and in what time frame, but there is an emerging consensus that such an outcome is inevitable.

In the past year the market has seen evidence that occupiers are starting to include sustainability criteria in their search requirements. The demand for a BREEAM ‘Excellent’ rated building is not uncommon and may well be followed in the not too distant future by requirements for a particular grade of Energy Performance Certificate (EPC) under the EU Energy Performance of Buildings Directive. Whether or not such occupiers are willing to pay an increased rent for highly sustainable space will depend on supply and demand. What is inevitable, however, is that property assets which perform poorly in terms of sustainability profile and energy efficiency in particular are likely to become obsolete far more rapidly than in the past, with some tenants being prepared to take space in such buildings, but only at a discount rent.

So why the sea change? Is it because of the overwhelming evidence that Climate Change is a reality and is a phenomenon which is no longer thought of as an issue which has little or no real impact on our day to day lives for the foreseeable future? Is it because beyond the scientific evidence the economic arguments are starting to appear more compelling? Even if we take a critical analysis of the Stern Review on the Economics of Climate Change, which highlighted the fact that Climate Change could cost up to 20% of global GDP each year by 2050, we cannot simply ignore the risk. Another driver of change is the energy and economic crisis that we are all facing today. Added to this, the growing plethora of legislation aimed at encouraging sustainability in the built environment is ensuring that even the most cynical investor has no choice but to consider how to respond to the issue. The likelihood that government will introduce fiscal measures to further encourage action can only result in even greater focus.

We have moved on a long way since publishing our Responsible Property Investment Challenges in 2006 and over the course of the years we have developed and implemented a fully comprehensive approach to RPI. All areas of our real estate business are now actively engaged in fulfilling our commitments. In order to drive RPI at the heart of what we do more effectively we have made a number of important changes to our RPI governance structure.

Tatiana Bosteels has joined in the newly created position of Head of RPI, reporting to Keith Bugden, development director. Formerly at the London Climate Change Agency, she is charged with managing our RPI programme covering all Investment, Development and Management activity. She will also be overseeing our new Responsible Property Occupiers (RPO) programme and a range of future-proofing initiatives, working closely with our Strategy team to assess future risks and opportunities.

I would like to take this opportunity to give recognition and thanks to our sustainability consultants Upstream and all our Property Managers whose contribution is crucial in delivering our RPI programme and sustainability improvements on the ground.

Our commitment to drive change across a broad front is further strengthened through our relationship with many of our joint venture partners. In addition, both MEPC and Argent have included a number of of their properties in our Responsible Property Management programme and we regularly meet to share best practice.

I am pleased to see that many of those invested in the UK property sector are now taking up the challenge of becoming responsible citizens. For our part, we are actively working with all those taking up this challenge with a spirit of sharing best practice across the industry and developing much needed tools and indices which will bring more transparency and allow better management and investment decisions.

On behalf of the real estate professionals at Hermes, we hope that you will find this report interesting and challenging and we would welcome your comments and feedback.