Making the green building business case for hotel owners

W Hotel Leicester Square glows RED for World AIDS Day

How to make the case for an energy efficient building?

Green Hotelier interviewed Stuart Kay, Chief Sustainability Officer at GreenPlace Assets about the current picture on sustainability in the hospitality industry, and how hotel operators can make the case for green buildings with owners and investors.

Green Hotelier: GreenPlace Assets advises investors, owners, developers and operators on sustainability in their investments. Do you feel like the hospitality sector is becoming more sustainable?

Stuart Kay: There are certainly the right sounds being made at head office level by many of the operators. I do think that this is taking some time to make it to asset level however. Hotels are all about guest experience, and I think it is fair to say that many hotel General Managers will likely prioritise furniture, fixtures and equipment (FF&E) expenditure before energy efficiency or sustainability solutions that they do not see as being as visible. The irony is that although it is difficult to accurately predict the payback on FF&E upgrades, retrofits in energy efficiency are able to be quite accurately calculated. Their return on investment and cashflow value impact can often be very strong.

In fairness, one of the most difficult challenges is in persuading hotel investors / owners to act. Incrementally, hotel brands are adding more sustainability language into their discussions with owners, but progress has been slow. It will take increasing stances by hotel groups to build sustainability into their brand DNA at contractual levels to take things to the next level. This will attract aligned investors, financers and asset managers to the brands that do this.

Further, owners (and their managers) need to realise the benefits and play a more active role by undertaking what are financially appropriate sustainability initiatives. Sustainability expertise is not yet generally held in-house by asset managers, so it is not pushed by them to their owners as much as it could be. GreenPlace Assets aim to differentiate there and move the industry in the right direction through the focus we place on sustainability, and the value it can create in assets, through our own asset management and also the independent advisory work that we undertake for owners, other asset managers and operators. 

GH: What do you think are the strongest drivers for low-carbon investments in hospitality assets as we enter 2018?

SK: It is hard to find value in real estate in the current global market. Hospitality assets are in strong demand, especially in core locations, so investors and those that manage their assets need to explore new risk-mitigated directions to enhance value. Due to market conditions, cap rates are low. The good thing about this is that, with lower cap rates, any investment that creates rapid payback and goes straight to an asset`s bottom line is going to be worth more than it would be in a market with higher cap rate conditions. It is not all about CapEx renewals either. Significant gains can be made through operational (no cost) and low cost retro-commissioning initiatives. These do go straight to the bottom line; improving Gross Operating Profit (GOP) for the operator and Net Operating Income (NOI) for the owner. It is in markets like we are experiencing today where asset management can really come to the fore, as it is all about optimising operational strategies and maximising value on assets under management. If things are too expensive to buy, optimise what you have. It is a good time to be planning cost improvement opportunities on hotels, including energy efficiency programs. Given energy is the second largest expense for a full service hotel after staffing, is a great place to be focusing efforts.

Stuart Kay

Stuart Kay

GH: Outside of energy savings in buildings, with energy efficiency being the area that gets the most attention in any project of this nature that may be initiated, what else can be addressed?

SK:  I believe in stepping back to look at the bigger picture prior to moving to detail. Many hotels and resorts sit within larger sites that offer opportunity outside the building envelope itself. Appropriate site planning at the development level offers enormous opportunity to use elements of passive design, building orientation, and the like to improve performance. Another area that offers large opportunity in new development – and existing properties - is appropriate landscape treatment. Correct landscape planning, design and operation is something that can be of great value to a hotel. From an aesthetic and visual amenity level, appropriate landscaping can transform the feeling of a property. It can also positively enhance functionality through shading of structures; reducing heat gain and need for cooling.

The selection of native indigenous species of flora not only add to the ‘sense of place of a site’, but also reduce the need for supplementary water and fertiliser. Furthermore, they enhance the biodiversity of a site. The way that water runoff is managed can be utilised for re-use in a property in the form of greywater. The use of runoff management and retention strategies also prevent impure water penetrating local ecosystems. In addition, building a strategy of sustainable landscape operations can yield strong cost savings. Too often I see hotels and resorts with inappropriate landscape treatment that does not address these points. It is not only within the building walls where sustainable strategies and operations have a payback and present opportunity.

GH: What are the challenges slowing down progress in making the hotel sector less carbon-intensive?

SK:  Solutions to impact at scale. The larger operators manage thousands of assets globally, yet they are forced to deal with owners at an asset-by-asset level regarding sustainability initiatives due to the fact the bulk of their asset owners whose hotels they operate may own only one asset, or a couple in most cases. Sophisticated solutions to enable them to address their portfolios at scale need servicing. We are actively working on solutions to this issue through strategies we are developing with significant partner stakeholders that will utilise the financial markets to aggregate and finance eligible projects; ideally at portfolio levels.

GH: What do you feel are the opportunities to improve sustainability across the lifecycle of hotels?

SK:  I think that a real problem is the division between development and operations teams in hotel organisations. Development teams are naturally interested in the development of the asset. Once complete, they move on to the next development and hand over to operations. Often though, the asset handed over is not up to a standard that would be typically desired by the operations team. If we look at the example of LEED (Leadership in Energy and Environmental Design), it is mandatory to have people that are involved throughout the process of the project to ensure that what is handed over to operations meets the operational requirement long term (typically referred to as ‘commissioning’). The idea of commissioning is still absent in general from hotel development projects as far as I have seen. Operators could include a resource (internal or external) to oversee the project on behalf of both the development and operations teams to ensure that the hotel handed over meets long term intent and requirements. Through some quite simple changes in process, a massive impact could be achieved for the industry. Additionally, the hotels built would be more efficient at a consumption level, more profitable at a lifecycle level, and more ‘in brand’ with the ever-increasing desire for operators to be seen as being sustainable.

GH: We often see people talking different languages: focusing on RevPar, ROI, CO2 emissions… what could help better communication and collaboration to make more sustainable investments?

SK: This is a key point that I raise myself when speaking on this topic. I think that momentum in the industry is suffering due to this very issue. This is a key area that we aim to overcome through understanding and speaking all of these languages.

I think that empathy is important. In order to truly reach a meaningful outcome, one does need to understand and appreciate the needs and wants of other stakeholders, who are very possibly motivated by other things to you. For example, a fund manager is perhaps facing some influence from their investors around ESG (Environmental Social Governance), so there may be an element of appreciation of the value of sustainability areas to them. However, the best motivation is what they and their asset management strategies can do to optimise their exit valuation and profitability of the asset under their management. Speaking about the impact this has on NOI and the exit valuation of their asset will get their attention more than discussing gigajoules and kilowatt hours. It is all about alignment and understanding of key motivators of others. At the end of the day, that is what makes things move forward in any sector.

 

Leave a Reply