Although in the collective imagination the term ESG is often associated with high-performance office buildings, in reality it is also a growing trend in the hotel sector. Establishing priorities on the sensitivity of the discussion in the various asset classes makes little sense; however, if we look at developments in international alliances and partnerships that have developed over the past 30 years, it can at least be said that the hotel industry has certainly been one of the forerunners of the ESG debate. Influenced by the fertile ground of sustainable tourism and aware of the impact of its consumption, ahead of all asset classes in ensuring 24/7 service, this industry has understood before others that synergies are necessary for a virtuous life cycle.
Alliances and partnerships to achieve Net Zero
In May 2020, in the midst of the pandemic crisis and with tourism grinding to an almost full halt, the UNWTO (United Nations World Tourism Organization) launched its sustainable vision proposal through its program "One Planet Vision for a Responsible Recovery of the Tourism Sector” using some of the hashtags that were favored also by other economic and political engagement programs launched during the Covid-19 emergency: #ResponsibleRecovery, #BuildBackBetter and #RestartTourism. What is the situation one and a half years later, after the G20 in Rome and the COP26 that has just ended, amidst controversy and commitments for the future?
The signatories of the program "One Planet Sustainable Tourism Programme (2021) - Glasgow I Declaration: A commitment to a decade of climate action" declared at COP26 in November their commitment to working together to transform tourism for effective climate action. In particular, the promise is to halve emissions by 2030 and achieve Net Zero as soon as possible by 2050.
Surely, this is neither the first nor the only initiative that seeks to identify a viable direction for this sector. The Sustainable Hospitality Alliance founded in 1992, whose ambitions later aligned to some of the UN SGDs, is noteworthy both for the big names that it brings together (e.g., Accor, Four Seasons, Marriott, Radisson, etc.) and for the fact that its 14 members have a 30% market share in terms of number of rooms globally, with 35,000 properties and 5.5 million rooms.
This hospitality alliance is committed to working together on four major areas of action: human rights, youth employment, climate action and water stewardship.
It is not alone in this direction, as apparently the critical point is to have clear and shared standards in order to achieve such ambitious goals. Thus, several international hotel chains including Melià, Hotels International, Barcelò Hotel Group, NH Hotel Group, Accor and Radisson Hotel Group — 25,000 hotels altogether — have started working on the "Basic Sustainability Framework" to be launched in March 2022 to provide practical implementation tools for a greener industry.
Many intentions, but what about the tools? And above all, how much does it cost to achieve sustainability goals in the real estate market?
The Colliers EMEA report ESG at a tipping point (October 2021) makes it very clear that 2021 was a year of preparation and significant transition in the way the real estate investment market must operate, partly in response to EU developments in responsible investment, from SFDR to taxonomy. Although ESG has gradually become an embedded part of the reporting of many companies, there is still inconsistency as to what should be included and in what detail: uniform methods and information will not be made available until at least 2022, while investors need to get ahead with their due diligence now, so they will not be caught unprepared.
The report then attempts to investigate how ambitious the Net Zero goal is, starting with the Global Green Building Council's estimate that only 1% of existing stock is genuinely Net Zero, despite the great progress made over the last 20 years. This means that in an attempt to quantify the cost of retrofitting required to make European real estate truly sustainable, CapEx requirement is assumed at €7 trillion, an incredibly huge sum compared to the annual transaction volume of around €300 billion in the region.
Returning to the hospitality sector, some investors who also operate in Italy have very good GRESB ratings in their hotel funds, showing a clear commitment to sustainability in their investment strategy and screening criteria. Here are a few examples:
- citizenM, a developer that generally builds hotels from scratch, started one of the first projects in Italy (see case study);
- it is also recent news that The Student Hotel (TSH) has entered into an agreement with UniCredit for an ESG loan of €145 million for the development of two new sites in Rome and Florence that also includes achieving a BREEAM 'Very Good' rating for both locations.
A reflection on hotel assets ESG and life cycle
Apart from the pandemic period, when tourism inevitably slowed down, the number of travelers is expected to increase in the next few years; therefore, the hotel sector too must seriously evaluate and limit its impact on climate change, engaging in a virtuous circle capable of generating profit while respecting the planet and people.
Is ESG premium a myth? And above all, at what stage of the life cycle is the weight of the ESG approach perceived from an investor's perspective?
In an attempt to simplify, we have identified four main macro-phases:
1. Entry phase, i.e., assessment of the opportunity
Increasingly, when assessing opportunities, investors are demanding products that meet ESG criteria and are including properties of increasing quality in their portfolios. Market operators are getting organized to respond to this issue, with different levels of maturity depending also on the assets available in the target country and the type of investment.
2. Pre-operational phase, i.e., defining CapEx
In the stage of asset positioning, the impact on costs must certainly be considered: whether greenfield or brownfield, which will be optimized in the operational phase. The extra costs mainly concern systems (MEPs), but affect almost all items of construction expenditure in addition to the soft costs (consultancy, design and certification).
3. Operational up and running phase
The impact of a hotel, in terms of both its lifecycle and use of resources, lies largely in its daily management, as it is one of the most energy, water and waste intensive type of property. For example, evidence from the US Green Building Council, supported by the International Finance Corporation (IFC), shows an average improvement in ROI in sustainable buildings. As a concrete example, in 2018, Courtyard by Marriott Lancaster became the first Marriott hotel in the United States to be 100% solar powered, producing a surplus of 1.2 million kWh of electricity each year.
4. Exit phase, i.e., disposal of the property
At this point in the investment lifecycle, compliant assets are expected to have generated better rents not only during the management period, but also in their portfolio exit value. This is when the green premium should be more tangible, both in defining the value of the property and in its attractiveness to a wider pool of potential buyers.
In conclusion, considering the direction of the European sustainable investment frameworks, assets that do not meet ESG standards may even decrease in value in the years to come.
CitizenM - Case Study
Fund Manager Alessadro Dileo describes the redevelopment work with LEED certification on the first asset of the citizenM Italian Properties Fund launched in March 2020 by Antirion SGR; the aim of the fund is to acquire properties in Italy, mainly in the cities of Milan and Rome, to be converted into citizenM brand hotels, a well-known hotel chain focused on the smart luxury segment, and to be managed by citizenM itself.
"The redevelopment and change of use class into a hotel of the property in Lungotevere de' Cenci by citizenM is one of Antirion SGR's most recent commitments to the sustainable development of our cities," stated Dileo. "The well-known hotel chain citizenM, in concert with Antirion SGR, has decided to apply for the LEED certification for the property once the conversion work is complete. This is a complex process: it began in the design phase, with all technical and design choices being submitted to the GBCI review for a preliminary feedback on the work that is being prepared. The reference protocol for certification in this specific case is LEED v4 BD+C: Hospitality, updated to January 2016. The minimum level of certification to be achieved with this development is Silver, with maximum effort to reach the Gold certification.
Achieving the LEED certification must be seen and experienced as a common goal of all those involved in the process, from the client to the designers and contractors.
The LEED certification is not just the icing on the cake of a property development, but it is, above all, a commitment to our planet by all those involved in the project. Building according to guidelines such as the GBCI guidelines means believing and investing in a future where the environmental sustainability of processes should be one of our priorities.”