Slowly but surely ESG is becoming a much bigger deal in the hotel investment industry as the twin drivers of consumer and investor demand push owners and operators towards making their buildings more efficient.
As the industry becomes more mature in the way it talks about the wider environmental and societal impact of operational real estate, more metrics are appearing that better help it quantify the effect it is having.
Zeal Hotels highlighted at a recent IHIF Sustainability Council meeting that measuring Energy Use Intensity (EUI) is crucial and subject was discussed in detail with data from full & limited service hotels. People are beginning to start talking about it, particularly investors, not all of them perhaps, but the likes of pension funds and trusts, are paying much closer attention to it.
EUI is a way of comparing the energy efficiency of different buildings and is calculated by dividing the total amount of energy used in a building by its internal floor area.
JLL described it as arguably the “single best piece of information to assess the sustainability of a potential site”.
Full versus limited service
Perhaps the biggest challenge for hotel owners is dealing with the range of EUIs across a portfolio of different operational assets. By their very nature limited-service hotels are most likely going to have a lower figure than full-service properties that may have leisure facilities or even a swimming pool, which would push the metric sky high. Getting on a CRREM pathway towards hitting net zero by 2050 is a big ask for these types of properties. A lot of money needs to be spent making these hotels more energy efficient and the longer stakeholders leave it the more expensive it is going to get.
It remains a balancing act between costs and efficiency too. Low-hanging fruit includes fitting LED lighting and installing voltage optimisers, but this will only get hotels some of the way there.
What can brands do?
As with so much in the hotel industry, achieving a meaningful reduction in energy usage involves getting multiple stakeholders on board. This is even more difficult in the modern age because of the split in opcos and propcos and the widespread usage of third-party managers, meaning you have got to get agreement between the owner, operator and the brand.
Some brands are trying to get things moving by linking energy conservation measures to long term incentive reward but the challenge is a lot of pilot schemes are needed to prove the business case so that it can be rolled out across a whole portfolio.
In many cases the costs are really significant, and can't be justified through typical calculations. Payback could be 15 or 20 years down the line. Crucially, for the brands, sustainability is also seen very differently in Europe compared with the United States.
EPC versus EUI
The UK government has set a target of getting the minimum Energy Performance Certificate (EPC) rating to B for all non-domestic buildings by 2030. That's a significant upgrade on the current requirement — in place since 1 April 2020 — of an EPC rating to be E or higher.
However, it’s important to remember that Net Zero is all about energy consumption, so in theory a building could have an EPC A rating but because of the way it is operated its consumption is very high on a per metre basis.
Green premium?
A big question among investors on the transaction side is: are we seeing buyers paying a green premium yet for assets that are a fair way down the net zero pathway. Given the state of the market that’s not really been the case. According to a survey conducted by JLL and the Energy and Environment Alliance (EEA) earlier this year, that’s not really the case. However, as transition capex is not a consideration for investment decisions, current buyers are looking for a price reduction or what is known now in the industry as a brown discount. It does really depend on the price, with smaller deals, which we are seeing a lot of, there’s probably less pressure.
Accounting standard changes
At an international level, climate change targets are often talked about as being years or even decades away, which can lead to companies and consumers shrugging their shoulders and saying “we’ll think about doing something tomorrow”. Gradually this is starting to change as voluntary systems are replaced by mandatory ones. One of the areas this is happening in is in financial disclosure where International Financial Reporting Standards (IFRS) Foundation is creating ESG and sustainability disclosure rules, which will be applied with the same amount of rigor and importance as financial reporting. The first tranche of changes came into effect in June this year.
There are also likely to be some sector-specific rules put in place for real estate, which will create consistency in ESG requirements across the built environment.
Stealth carbon tax
Another thing the industry needs to be mindful of is the increasing costs brought in by local authorities and governments as countries try to reach net zero. In the UK for example there are levies that are charged relating to the environment when it comes to development and these contributions can run to the hundreds of thousands of pounds for certain buildings.
More doing, less talking
One of the biggest changes seen across the hospitality real estate sector over the past 12 months has been a move from talking about ESG to actually doing something about it. Some of this is being driven by “sticks” imposed by regulators, with many in the industry hoping for more “carrots” in the years to come.