They are driven by megatrends: geopolitics, technological change and digitisation; demographics and urbanisation; the impact of a globalised workforce and migration; as well as environmental stress, resource scarcity and climate change.
At Hermes, we have long recognised that responsible investment practices are changing real-estate market conditions. Regulatory drivers and growing market demand indicate that sustainable portfolio and building characteristics affect real estate investment’s fundamentals: it creates reduced risk of obsolescence and depreciation, enhances tenant retention, reduces void periods and lowers operating costs.
Responsible investment has been at the heart of our real-estate investment strategy for many years, and our focus on generating holistic returns commits us to delivering excellent long-term investment performance and stewardship while being acutely conscious of the impact that our activities have on communities and the environment.
We believe that responsible property investment (RPI) can provide both superior financial returns and a better, more sustainable society. We invest actively and take a long-term approach to understanding the drivers of the changing real-estate landscape and the related shifts in demographics and lifestyle. Our RPI philosophy is based on employing patient capital to go beyond financial outperformance1. Our place-making approach seeks to make buildings part of the community in order to develop meaningful cities, where people want to work and live, and in which they take great civic pride.
Source: Hermes as at September 2019.
By investing for outperformance while aligning our strategy to the needs of society as it changes, rather than managing pure-play impact-investment products, we seek to help deepen the practice of responsible investment. This means using a purposeful framework to focus our real-estate operations on impact themes, and within these targeting activities with measurable environmental, economic and societal impacts. Intentionality, a conscious aim to create positive impacts through investments, and transparency are key elements of this approach.
Intrinsic to our ability to generate positive impacts within our mandate is the concept of meaningful cities: urban places where people want to work and live, in which they take great civic pride, and which they want to support through social, economic, leisure and community-based activities.
We have acquired a number of large urban-regeneration opportunities across the UK.
Our meaningful place-making developments span nine UK cities
Innovative, commercial and responsible, NOMA is a 20-acre, £800m scheme in central Manchester and the largest urban development outside south-east England. Previously, NOMA was the site of Shudehill Mill, the 18th century cotton mill that accelerated Manchester’s development as an industrial leader. Its major features include:
These properties and spaces, the businesses and people they attract, in addition to aligned social and cultural initiatives, are giving NOMA a new identity, deeper sense of community and bringing more people to this part of central Manchester.
Source: Hermes as at December 2018.
The 20-acre site – originally part of Leeds Central railway station, which closed in 1967 – was converted into a green space in 2009. We have worked with developer MEPC to ensure that the interests of people inspire the buildings and open spaces we create.
Some of the key highlights include:
Source: Hermes as at April 2019.
In December 2017, the King’s Cross Central Limited Partnership, of which Hermes is a member, released an extensive study carried out by Regeneris, “The Economic and Social Story of King’s Cross”. It details positive social impacts of the transformative regeneration of the area, providing valuable quantitative data, such as the following highlights:
This research enables a better understanding of the social and economic impacts of successful place-making.
Having contributed to these achievements, we continue to learn from them. We have applied this knowledge and experience to all of our urban-regeneration projects.
Source: Hermes as at December 2018.
Hermes Infrastructure also has a longstanding commitment to the principles of responsible investment. We began investing in infrastructure in 1996 and today, with £4.4bn of assets under management, we are one of the UK’s largest direct investors. Our investment portfolio currently comprises 15 investments spanning renewable energy, regulated utilities, ports and transport infrastructure.
Our responsible approach to investing means that we believe a portfolio company’s approach to ESG considerations materially impacts long-term value and all aspects of risk management.
The public service nature of infrastructure assets means that it is important to focus on responsible investment. It also highlights the need for sustainability and a high-quality, affordable service. Infrastructure projects are generally long-term partnerships and so, it is important for key stakeholders, such as the community, regulators and investors, to engage constructively.
Source: Hermes as at December 2018.
Our investment in Eurostar is illustrative of our commitment to environmentally sustainable transport. Not only does a Eurostar journey emit 90% less carbon than the equivalent short-haul flight, Eurostar’s commitment to further reducing its impact on the environment is embodied in its “Tread Lightly” programme:
Source: “Delivering Holistic Returns,” published by Hermes in 2019.
In October 2013, Hermes Infrastructure also made a significant investment in Thames Water, the UK’s largest provider of water and sewerage services. The UK water sector operates under a mature and transparent regulatory regime, providing long term stable and predictable inflation linked cash flows. This made Thames Water an attractive investment.
Similarly, Hermes GPE aims to generate sustainable returns for investors: we focus on fund investments and co-investments in buyouts and growth businesses. We also invest in fast growing companies operating in sectors set to benefit from trends that are reshaping global economic activity.
Working in partnership with a worldwide network of established and emerging General Partners, we construct co-investment and fund portfolios using a well-established and disciplined investment process.
In December 2018, we completed our 200th co-investment: we invested in Zenitas which is a leading healthcare business that is headquartered in Melbourne and has regional operations across major Australian cities. Secular demographic trends as well as a favourable regulatory landscape are driving market growth in this area, and we believe the company’s platform is well positioned to benefit from these trends.
