CEE Hotels to improve ESG credentials

Hotel investment activity in the CEE-6 region reached EUR 464 mln during the 12 months ending June 2023, despite a notable increase in financing costs and the ongoing economic and geopolitical challenges. This is 74 pct more than in the previous 12-month period. Between H2 2022 and H1 2023, 23 hotels comprising almost 3,000 rooms were sold. With several significant deals in progress, this year’s transaction volume may reach EUR 563 mln by the end of 2023, nearly 30 pct more than in 2022. Investor appetite is fuelled by the strong recovery in hotel performance across the region, with revenue per available room (RevPAR) surpassing 2019 levels by 6 pct in H1 2023.

According to Cushman & Wakefield’s research, half of hotel investors in CEE already address ESG in their transaction due diligence, and 40 pct are in the process of including it. The reason is strengthening regulation and the opportunity to increase the value of assets, as well as the threat of potential issues during transactions.

Hotels can notably reduce energy and water consumption by implementing sustainability measures. According to the latest Cornell Hotel Sustainability Benchmarking Index (CHSB 2023), the average final energy consumption for a sample of 31 full-service hotels in Warsaw, Prague and Bucharest was 166 kWh per occupied room in 2021, while the 25 pct most efficient hotels had about 41 pct lower energy usage at 99 kWh per occupied room.

Reducing energy usage has become even more relevant due to recent price increases. According to HotStats data, energy costs in hotels across Eastern Europe accounted for 3.9 pct of total revenue in H1 2019, increasing to 7.2 pct in H1 2023. On a per-occupied-room basis, the utilities expense increased from EUR 4.6 to EUR 9.0 over that period, a 95 pct increase. This reduced hotels’ gross operating profit in Eastern Europe by about 9.1 pct. Notable savings can also be achieved in water consumption.

ESG is not only a moral imperative, but also a key driver of value creation and resilience in the hotel industry. As the expectations of guests, investors, and regulators evolve, hotel owners and operators need to adapt and innovate to meet the growing demand for sustainable and socially responsible practices. The EU is dynamically developing legislation to promote the green transformation. Several legal acts have already been adopted to strengthen the effectiveness ESG reporting. These will have a direct impact on the financial sector as well as on the hospitality sector, because stakeholders will increasingly assess the ESG performance of hotels.
Lukas Hejduk, head of hospitality, CMS

Warsaw’s relatively higher share of eco-certified hotels is an exception in CEE, where the overall level is low due to shallow brand penetration, high fragmentation, and low institutional/international ownership. Institutional investors tend to have strong ESG policies, sometimes including compulsory certification of their real estate portfolio. However, many hotels in CEE are privately owned. Institutional investors active in the region, such as Union Investment, Deka, Invesco and Accor Invest, primarily own hotels in Poland, which explains its current higher share of certified hotels.

To comply with increasing requirements from investors, regulators, and other stakeholders, hotels in the CEE region will need to notably reduce their carbon footprint and energy intensity. According to energy reduction pathways in the latest Carbon Risk Real Estate Monitor (CRREM) tool, The carbon intensity of hotels across the CEE-6 countries is expected to be reduced by ca. 17 pct by 2025 and 53 pct by 2030, and this assumes the hotels meet the 2023 targets, which might not be the case.