In recent years, greater emphasis has been placed on Environmental, Social, and Governance (ESG) considerations in the hotel capital markets and it has become more heavily integrated in investment and asset management, with ESG now profoundly influencing investors’ decisions.
A survey carried out by JLL in collaboration with the Energy & Environment Alliance (EEA), found that out of 50 large hotel investor groups, 60 per cent were considering transition capex in the next 12 months, with 90 per cent considering transition capex in the next eighteen months. The survey also found that emphasis had moved beyond real estate certifications.
What to work on
“Certification is something new which wasn’t requested for five years ago. However, nowadays, there is not one single hotel that we buy or sell where there isn't the question, ‘Do you have a BREEAM certification?’ or ‘In your fund, are you GRESB certified?’,” noted Emmanuel Dissez, co-head of Asset Management, Hotels at Schroders Hotels.
However, he stresses that that even achieving top ratings doesn’t mean the job is done.
“Certification is just a piece of paper showing that you're doing something, it doesn't mean that you are at the end of the journey. It doesn't mean that you shouldn't be doing more but at least, it gives you a benchmark,” he says.
So if certifications such as BREEAM and LEED aren’t enough, what more needs to be done in the journey to, and past net zero? What are the factors influencing investor decisions? What steps does the sector need to take to ensure it’s not left behind?
Adrian Flueck, director, hotel investment management, Europe at Invesco Real Estate says that when considering an investment, to begin, the investment manager goes through a checklist which includes looking at credentials, assessing risks and when looking at leased assets, examining the tenant as well.
“We ask ‘What's the energy performance certificate and what's its rating? Does it have an existing real estate certification?’ And then digging deeper, we look at the consumptions around the CRREM model which analyses the building and defines its position on the road to net zero.
We also look towards the tenant. What does the tenant do? What’s their sustainability strategy. We do on acquisitions but also we analyse our existing portfolio on that basis in order to future proof,” he says.
When approaching acquisitions, Tina Yu, principal at KSL Capital Partners says that the social and governance elements of ESG are incredibly important.
“Oftentimes we partner with management teams to make sure we’re setting these companies up for success longer-term. We're in environmentally sensitive areas like ski resorts or beach resorts and so for us, it's not just about making sure there's no liabilities on the capex or legal side that will hit us. It's about the long term value we're creating ultimately, through helping to drive the E,S and G side?”
Moving ahead of regulation
Experts also stress the importance of not following the pace of regulation but instead, going further and keeping abreast of any changes.
“The problem with regulation is that it's evolving all the time. Targets move and regulations change, and what is okay today might not be fine at all in future,” Dissez says.
Yu agrees, stating, “Waiting for the regulators to catch up or to put in the regulation is already playing from a position of being behind. Having seen first-hand some of our portfolio companies and how much work and time it has taken them to get even the data set to measure what they're trying to measure, I’d say not being an early mover is putting yourself behind, because it's going to take an incredible amount of time and resources to even put the measurements in place and tools in place.”
Cost and ROI considerations
While many recognise the importance of a sustainable and environmentally friendly hotel sector, a big concern is the cost of transition and whether the return on investment will justify capital expenditure.
Research done by JLL and Cushman & Wakefield attribute some single digit pricing premium and some small yield compression for sustainable hotels.
Elena Ladisova, vice president of portfolio management, real estate at Brookfield Asset Management points out that although there isn’t a lot of certainty around the achievement of a premium in pricing due to being greener, buyers today factor in the cost of transition risk and putting the assets on net zero carbon path, and factor that into the price.
On other benefits to prioritising ESG, Yu notes that in a time of labour shortages, especially in Europe, where it’s challenging to retain staff and attract labour, companies which really embrace ESG are becoming more attractive employers.
“We’re seeing better retention because of that. I think it’s a real competitive advantage from an employment perspective.”
Dissez adds that that in addition to the green advantage of being more sustainable, not doing anything will end up being more costly, noting that some countries including France are introducing very stringent regulations and consequences.
On the cost side, he stresses that even making little changes could make a huge difference in terms of wasting less, caring for the environment and making savings.
“In one of our hotels in Dusseldorf managed by Hyatt, just by installing a camera above a major bin, we were able to find out we were wasting a huge amount of bread and after a month of training staff, we were able to reduce by 60% the amount of bread being wasted. Just implementing one change in the kitchen, one in housekeeping, one in rooms and one in front of house makes a huge difference.
I don't think that we realised how much impact overall that very small details in everyday operations of a hotel had. And it's by looking at the data and analysing it that we are able to make the changes,” he says.
The role of brands and operators
On what brands and operators have to do to facilitate the transition to net zero and achieve ESG goals, Yu says an important one is providing data to organisations that are trying to create the right measurement tools. Another, she says, is operationalizing all the policies which have been put into guidebooks to reduce carbon emissions.
“Employees in your hotels and management companies do a lot to actually reduce emissions. And so how do you provide the right training tools and regular training for those employees to actually put those things are written in a book, to action? I think the brands can do a lot to drive that,” she notes.
Ladisova adds that brands and operators have direct communication line with consumers, consumers which are linked to most of the energy consumption that happens in hotels. She says there’s an opportunity to use that direct line of communication to influence how the facilities are used and how people interact with the brand.
“We don't see a lot of that. And if we do, it's very kind of light it can be perceived as not authentic enough and not a strong value of these brands. I think they have a lot to do in that space,” she says.
Dissez adds that it’s important for owners and brands to work together to head in the same direction and achieve ESG goals.
In order to avoid hotel assets following the path of some office assets today and becoming stranded, Yu says it’s extremely important to get ahead of the curve and bring hotels and relevant companies up to speed.
“We shouldn’t leave existing hotels stranded to the point where we have to repurpose them or demolish them. One of the things we’re doing is working with the EEA on providing the data set to actually come up with measurement tools that apply to specific asset classes we invest into, rather than adopting a one size fits all approach.”
While there are challenges to overcome, there is also immense potential for growth and profitability in the transition to a more sustainable model. Experts believe that to future-proof hotel assets, it is crucial for brands, operators, and investors to collaboratively prioritise ESG factors, focus on data-driven decision making, and actively work toward net-zero goals, actions which will ultimately contribute to a more sustainable and resilient hotel sector.
All those quoted in the article appeared on stage at the International Hospitality Investment Forum held in Berlin between May 15 and 17, in a session called: Capital Outlook: How is ESG Really Influencing Investors' Decisions Now?