Sustainable Hospitality Insights

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Clients often ask whether we can see evidence that hotel brands and investors choose to avoid the acquisition of hotels without a specific level of green / energy efficiency rating to avoid damaging their own sustainability strategies / net zero commitments.

We have not seen specific evidence that the hotel brands discriminate as yet (we recognise that they oversee huge portfolios and operate globally, so consequently have to set an achievable bar across all these markets to ensure they can deliver consistent levels of standard and service), but we do see investors picking and choosing carefully:

• Certain classes of Core, Core Plus investor are undoubtedly now avoiding assets that carry a substantial refurbishment programme to mitigate the risk of becoming stranded
• Whereas, other Alternative/Turnaround investors are attracted to under-ESG-invested assets at the right price as turnaround plays
• But no rational investor wants to be left holding difficult (or potentially impossible) to sell assets after a typical 5-7 year hold period
• The trend is clear that demand for ESG-poor assets will weaken, although enduring high prices for ultra-luxury trophy assets (often historic, landmark buildings with low energy efficiency) muddy the waters

Importantly, lenders are incentivised to avoid financing under-ESG-invested assets, to ensure that the asset they are lending against retains its future value

• As much as anywhere, the banking sector – driven by EU regulation – is where governments are applying pressure to drive changes in investment approach and behaviour
• To satisfy regulators, banks are increasing the percentage of their lending classified as “green loans”. The Net-Zero Banking Alliance sets out best practice in its Climate Target Setting for Real Estate Sector Financing
• Considerate has been working with a specialist international property and hospitality lender to develop and roll out an ESG credit report for their new and existing hospitality loan portfolio.

The disconnect between institutional investors (taking a structured approach to net zero goals) and certain private investors (wokery, fad), suggests that there may be an opportunity to exit more challenging properties and sell them to more sceptical investors before the views of these sceptics start to align with the rest of the market. 

For ESG assets, evolving guest expectations are likely to erode margins, leading to them becoming operationally unattractive over the medium-term.

As was the case with GDPR, we believe that EU ESG regulation (EU Taxonomy, CSRD, double materiality assessments) will steadily become a de facto global standard, with similar legislation being adopted worldwide.

Shawn Hesse from JLL, highlighted KPMG analysis of ULI Europe 2023 survey data that supports this position – that investors are increasingly prepared to walk away (and indeed are walking away) from deals with a red flag from ESG due diligence.

As ever, dislocations in the market present opportunities for investors as well as risks. Where some investors shy away from the risk of stranded assets, others are actively looking for opportunities to pick up hospitality assets on the cheap – to invest, refurbish, renovate and deliver outsize returns to their investors.

Based on research from over 200 European property investors and managers in Q423 (Urban Land Institute), 61% said that they had walked away from potential acquisitions because of concerns over holding a stranded asset – an assessment of transition risk had resulted in the acquisition not proceeding. Separately, 54% indicated that they had allocated assets for disposal because of transition risk.

The concept of stranded assets is not new, these are assets that have suffered unanticipated or premature write-downs or devaluations due to changes in their risk profile. However, in the current context, investors’ concerns focus on assets that risk becoming stranded due to climate change. By way of example, Lim Chow Kiat, CEO at GIC, noted in the opening letter of GIC’s 2023/24 annual report that the effects of climate change are becoming “both more intense and unpredictable”. Climate impacts must now be one of the key factors to consider when assessing potential investments.

Stranding risk as ecologic obsolescence

The failure of a building or infrastructure to reduce GHG emissions and energy use below the pathway target at any point in the future results in a so-called ‘stranded’ asset – a form of building obsolescence.



CRREM analysis – investing behind (“stranded” asset) and ahead of the curve

With many businesses re-evaluating their office footprint amid changing work patterns, office leasing has been falling in cities around the world. According to JLL research (Feb 2024), global office leasing volumes are around 6% lower than a year ago, and 24% below their pre-pandemic levels. 

This is a factor behind investors considering converting offices to other uses, from housing to hotels. Where refurbishment upgrades a building’s quality and sustainability, repurposing, which is typically considered at the end of a building’s lifespan, adapts buildings for new uses. Ever-tightening sustainability regulation is a clear driver as it means heavy capital investment and carbon impact.

Stranded asset risk can present M&A opportunities

As a result of stranding risk, we expect to see more assets being repurposed, which may present M&A opportunities as mismatches emerge between assets and the risk appetites of their owners. Liquidity constrained asset owners may prefer to divest rather than repurpose or enhance a building. Whereas longer-term institutional investors are likely to prefer to buy and hold higher quality assets as a lower-risk strategy, more nimble investors, for example private equity, may see ESG-challenged assets as a source of additional return, an “ESG turnaround strategy”. 

Well-funded active investors with a high-risk appetite are likely to be leading the charge.