Today, more than ever, organisations are expected to take in to account a wide range of non-financial considerations, broadly relating to Environmental, Social and Governance (ESG) factors. Sustainability, specifically, has become a core requirement for investors and we have been seeing an ever-increasing amount of capital being directed towards sustainable investments. In Europe today, roughly 50% of all Assets Under Management (AUM) can be classified as ‘sustainable assets’.
With countries reinforcing commitments to carbon reduction with the recent COP26 conference we expect regulations and reporting standards to move forward with standardising requirements for sustainability to be built into all investments. We have already seen this with updates to Markets in Financial Instruments Directive II (MiFID II) and the recent Introduction of the International Sustainability Standards Board (ISSB). Going forward we see such developments further pushing capital towards certifiably ‘sustainable’ investments.
Hospitality is the real estate sector that is most exposed to the changing tides of sustainability demands from investors, with high exposure and sensitivity to consumer demands coupled with the strong relationship between costs, energy consumption and the efficiency of such.
At AHV Associates, we see this rapidly evolving situation bringing both grave dangers for those who fail to react, yet significant opportunities for those who are able to adapt, and particularly for those brave enough to be first movers.
The evolving situation presents opportunities to not only maximize profits but also to minimize exposure to risks, both from a regulatory and consumer demand perspective. On the other side, we see profit maximization coming from a matrix of enhanced consumer demands, reduced operating costs and access to cheaper debt financing instruments, with an expectation for yields to yield differentials between green and conventional financing to widen over the long-term.
It is this access to cheaper debt financing, defined as green finance, that we see as the key to this cycle of value creation. Given the nascent stage of development of the green finance sub sector, particularly as it relates to hospitality (only emerging in 2019), available data is thin on the ground. Research from French asset managers Amundi however, suggest that the average so called “greenium” on green finance products (lower interest and coupon rate payments, for borrowers and bond issuers, respectively) is between 15 and 25 basis points.
In hospitality, we have seen this gap widen significantly, as evidenced by the widely publicised Whitbread green bond offering.
Whitbread’s issuance of two green bonds in February 2021 suggests that the greenium in hospitality could be as wide as 70 to 132.5 bps cheaper than the equivalent cost of finance for a similarly rated issuance.
Importantly, these savings are exaggerated when looked at in relation to the overall cost of financing, equating to a 10% saving in the wider market and rising to as much as a 35% saving in hospitality
In our research we find that this additional greenium in hospitality is to be expected, given the unique position of the industry, being highly sensitive to consumer preferences and with highly energy intensive operations. We see the Opportunity of the Horizon therefore as a continuing cycle of value creation through lower operating costs, higher occupancy rates and RevPARs, cheaper costs of financing, and lower exit yields.
If you would like to find out more about this unique opportunity please follow the link to our most recent Semi-Annual Research Report: ‘The Opportunity of the Horizon: Green Finance in Real Estate and Hospitality’: https://www.ahvassociates.com/Latest-Research/
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