CIO Statement
Tim Turnbull, CIO, Hermes Real Estate

This has been a tumultuous twelve months for the financial markets, the global economy and for the property sector. We have been reminded of how important it is to take a responsible approach to assessing risks and opportunities over the medium and longer term and this sentiment also applies to the social and environmental challenges facing the property sector.

There is an emerging consensus among real estate experts that sustainability will have an inherent and fundamental impact on long-term returns. Property assets which perform poorly in terms of sustainability are likely to suffer increased obsolesce, face longer voids and depreciate in value more rapidly than in the past. There are three contributory factors which are very likely to accelerate this process:

First, the government will continue to act upon its commitment to addressing climate change. With buildings responsible for some 50% of the UK’s carbon footprint, we in the real estate industry have to take responsibility. In the spring of 2010 the Carbon Reduction Commitment scheme will assign a price to carbon emitted by buildings. This will result in potentially significant costs to the sector, but will also offer financial opportunities for the most proactive companies, as estimated by our Hermes Emissions Trading Scheme. Furthermore, Energy Performance Certificates are now an integral part of real estate transactions and it would be of little surprise if the government were to link them to some form of taxation in the future.

Second, occupiers will continue to look for cost savings wherever they can find them. Companies understand that the ‘green’ agenda is also an efficiency agenda, and given the choice, they will almost certainly choose to occupy more sustainable buildings. Indeed, in the near future, prime commercial property will incorporate many sustainability characteristics as standard.

Finally, investors will begin to incorporate the impact of sustainability into their assessments of value. Energy performance certificates and sustainability benchmarks, permitting direct cross-sector comparison will, eventually, result in the inclusion of sustainability in valuation assessments. Our commitment to developing an understanding of this trend will allow us to make better informed investment decisions.

Across our portfolio, our well established responsible property management programme continues to deliver real savings, which in turn directly helps our occupiers. Our pro-active responsible approach ensures that these drivers are integral to our investment strategy. As a result, we believe we are well positioned to deliver long term sustainable investment returns to our clients.

The examples put forward in this report illustrate the value generated by our responsible investment approach. We hope they will inspire you to act and to share your own achievements. We very much welcome your feedback and would be happy to discuss how we can take these actions further across the industry.