Investor appetite for luxury hotels continues despite environmental challenges

Despite the mounting challenges of climate change and resource management, hospitality investors are unlikely to give up on golf courses, resource-hungry luxury hotels and ambitious marina projects in the immediate future – although views are beginning to shift, according to experts in the sector.

“To date we have seen more evidence of brown discounts in the sector rather than green premiums,” says Rekha Toora, senior vice president - hotel capital markets at JLL, although she notes that “it is certainly a liquidity point for the larger institutional investors”. She adds: “Potential investors are however asking themselves what they need to consider from an ESG perspective to preserve value and to ensure they have a buyer at exit, particularly for assets of much higher value.”

A sticking point has become the resilient luxury hotel segment, which continues to attract investors for its robust income metrics thanks to guests being less sensitive to price rises passed on over and above inflation. However, energy consumption can be challenging. “Luxury hotels have many more amenities compared to limited-service hotels. They have swimming pools, spas and restaurants that are much more energy intensive; in more tropical climates there’s also a huge spend on maintaining the temperature. There’s a view that guests aren’t going to be happy with a lower level of service, but this is gradually changing as consumers become more aware about waste management and energy preservation,” Toora notes.

Yet underwriting deals is involving an ever-broader range of parameters. “Insurance risk premiums tend to be higher where there is greater climate risk. More generally, sustainability aspects have moved centre stage, driven by national targets and limited partner requirements, amid a push to make real estate as resilient as possible,” she adds.

However, there are often ‘fast track’ options for improving hospitality real estate compared to the broader commercial real estate industry. “It’s easier to make changes to operational hotels than it is for example offices,” she adds. “With offices, you need tenants to allow you access to take data points and eventually enact improvements. That’s not an issue with hotels, where you not only have access but also the ability to make changes more quickly.”

Improving older properties

The direct connection between operations and emissions also means that older properties aren’t always the worst culprits in the world of hotels. “Applying a strategy around resource consumption and waste management can make a big difference quite quickly,” she notes. “There is a view that hotels can’t achieve net zero carbon, which isn’t necessarily the case. It’s just that investments haven’t really been evaluated in that way up until now and it may be that a hotel doesn’t meet annual energy consumption targets until 2050 but a shorter timeframe.”  She suggests that how a hotel is run, the extent of onsite renewables and the age of the mechanical and engineering equipment can also make a difference.

Notably, the Energy & Environment Alliance (EEA), a not-for-profit coalition of hospitality sector leaders, is now working with BREEAM to develop the EEA-BREEAM standard, which will solely be applicable to hospitality buildings and operations, in recognition of their unique challenges and opportunities. 

Alternative investment management platform Azora Capital recently announced plans to overhaul the seven hotels it purchased from Med Palya in 2019 with a view to achieving a 25 percent energy reduction across its Spanish portfolio. The focus is around reducing greenhouse gas emissions, improving energy efficiency and minimising dependency on fossil fuels across each asset and is targeting a total energy saving of 4,300 MWh/year to lower carbon emissions by 1,100 tonnes per year.

Initiatives will include replacing natural gas hot water boilers with modern air/water heat pumps, adding a photovoltaic solar energy production plant to each building and installing thermal production control systems, as well as equipment to optimise electricity supply. Says Gonzalo García-Lago, partner at Azora hotels & leisure: “The initiatives we have rolled out across the Med Playa portfolio will be analysed as we look to replicate the success of this pilot project across the rest of our portfolio. Our objective is to continue taking measures to modernise our assets and reduce the carbon footprint of our activity as much as possible.”

Modular construction

New hotel developments, meanwhile, already have an eye on improving resource management from the ground up. For example, modular construction is on the rise thanks to several pioneers, with APG-owned CitizenM having built its first modular property back in Amsterdam in 2008.

Meanwhile, Starwood Capital Group is trying to write a more romantic tale around responsible hotel management with its line of Treehouse Hotels, launched in the UK in 2019. Its Manchester property boasts energy and carbon savings along with a use of reclaimed and recycled materials in its construction and furniture. While the Treehouse ethos talks of ‘celebrating found objects, nostalgic tunes, handmade details and locally sourced treats’ the concept is also ripe for the pragmatism of offsite production. FullStack Modular is currently producing 200 modules for the brand’s 100 percent modular US debut in California. With factory times estimated at six months and on-site construction at three, modular building techniques are generally thought to save at least 20 percent in costs compared to traditional methods, as well as reducing site waste, noise and traffic. 

Climate change signs

Yet as climate change risks alter the globe’s topography, resource management and construction  techniques are unlikely to be enough to defend the hospitality infrastructure of the future. New research from independent climate risk analysis company  Cross Dependency Initiative (XDI) names northern France, northern Germany and northern Italy as the areas modelled to experience the most damage in Europe by 2050. Devastating recent floods in Italy’s Emilia Romagna region also tell an all too familiar story, following on from similar disasters in Liguria.

The port of Rapallo in Liguria was destroyed by sea-storms in 2018 and work is just starting now on its sustainable reconstruction. Real estate development company Bizzi & Partners has taken on the complex task. Alessandro Gelli, head of the Porto Carlo Riva works, notes that “attention to the environment is central to the new port”.  He adds: “In the course of the work, we used thousands of tonnes of inert materials recovered from the storm surge and a large part of the materials for the embankments are 100% recycled aggregates.”

The project is also closely monitoring flora, fauna and air quality in order to preserve the natural marine ecosystem adjacent to the construction site areas, in cooperation with the Italian Ministry of the Environment and Energy Security. “Thanks to the redesigned berth layout, pollutant emissions will be reduced by more than 31%,” Gelli adds, noting that electric charging points are being added for modern speed boats as well as for cars. New emptying networks will help manage the discharge of beige water and black water. For Gelli, this is not just about serving the environment, but recognising that particularly in this field, end-user views are changing fast. “The new generations of yacht owners and yachtsmen are particularly attentive to issues of environmental impact and ecological transition,” he notes. “This is also about realising an impressive structural work of public interest aimed at securing and improving the defence of Rapallo from the consequences of climate change.”