Impact on Hospitality Investment Decisions

According to JLL, Asia-Pacific (APAC) investors often underestimate sustainability’s significance during hotel transactions despite mounting evidence of its business benefits in risk mitigation and opportunity creation. This oversight prompts questions about the crucial factors that direct capital allocation towards sustainable real estate and the potential impact on property valuations. Climate change is increasingly emerging as a key downside risk to the hospitality sector and asset values worldwide.

Physical climate risks, such as the rising frequency of extreme weather events, directly impact profitability and cash flow stability through business interruptions and higher repair costs. On the decarbonization front, governments worldwide are implementing building performance standards and carbon pricing mechanisms to discourage high-emission practices in the real estate sector.

Transitioning to a green economy presents opportunities for real estate and hospitality, such as energy, water, waste savings, and green energy procurement. Businesses that recognize and act on these opportunities have shown greater resilience. For instance, Shangri-La in Chiang Mai weathered recent floods due to installed floodgates, while other properties suffered significant damage.

However, investors differ in how they assess the timing and impact of climate risks and opportunities. Investors typically operate on shorter investment cycles, but climate risks may take 15 to 20 years to materialize, complicating effective pricing and accounting for climate-related risks and opportunities.

The impact of sustainability on transactions is becoming increasingly evident across various asset classes globally. Geographical disparities in Environmental, Social, and Governance (ESG) impact on transactions are apparent. Europe and Australia show clearer evidence across various sectors due to their more regulated and institutionalized markets.

Investment criteria are evolving to incorporate climate resilience when defining a core investment. These trends across sectors and regions indicate the growing influence of climate-related factors on investor decision-making and transactions. As European and institutional investors refine their global ESG approaches, APAC property owners must be prepared with comprehensive data and information to effectively address ESG due diligence inquiries and appeal to a wider range of potential buyers.

Climate change’s impact on cash flow volatility and hospitality sector stakeholder requirements necessitates owners and investors revising their asset management and investment strategies. Integrating sustainability into hospitality investments is not about sacrificing returns or being overly conservative; it’s about comprehensively understanding future risks and opportunities to uncover potential opportunities and build resilience in an unpredictable business environment. Therefore, incorporating future climate scenarios into governance structures can promote forward-thinking decision-making, enabling owners to seize wider sustainability opportunities and address potential risks.

As climate change continues to influence the hospitality and real estate sectors, understanding the impact of sustainability on transactions and business resilience is becoming increasingly crucial. Therefore, investors and owners in these sectors must adapt their strategies to remain competitive in the evolving business environment.