When cutting hotel emissions offers a competitive edge

Ever wondered what it takes to keep the mini-bar running and the air temperature perfectly optimised in your hotel room? One company that believes it meticulously manages these details, while minimising environmental impacts, is global hotel developer and fund manager, Pro-invest Group. For Pro-invest, ESG is not just a buzzword, it is integrated into every level of operations. 

The Group – which owns and operates 6,000 hotel rooms in Australia and New Zealand – believes that by focusing on the emissions profile of its properties from design to operation, it can gain a significant competitive edge. 

Pro-invest undertakes the entire lifecycle of a hotel investment – from design and development; through to operation; and then to the creation of investment funds holding the assets.

“Having an integrated business model allows us to deliver against those promises more easily because we can cover the entire value chain,” says Pro-invest Co-Founder and CEO Europe Dr. Sabine Schaffer. “In other words, we are in control, so we can also be held responsible.”

The Pro-invest in-house development team ensures that new hotels are designed and built to incorporate low or zero emissions outcomes. In 2021 the Group achieved an Australian first when its hotel building, Holiday Inn Express Newcastle, obtained Climate Active Carbon Neutral certification through the NABERS pathway, thanks to efficient design and operation, alongside carbon offsets.

Pro-invest has an in-house operating team, which takes over the running of an asset once construction is completed.

Schaffer says that having development and operations under the one roof removes the intrinsic conflict of interest between a developer wanting to keep costs as low as possible and an operator who wants a low emissions profile. For instance, a developer selling their property might purchase low-priced mini-bars that use more energy, because they won’t be responsible for ongoing costs. But Pro-invest understands the broader benefits of seemingly small choices such as opting for highly efficient mini-bars, which can be up to six times more efficient than standard models.

Environmental due diligence

Pro-invest also buys existing hotel assets, and just as it does when it’s designing and developing its own hotels, it considers carbon emissions and other ESG metrics from the outset and carries out an environmental assessment alongside financial due diligence.

For instance, it will consider a building’s NABERS (National Australian Built Environment Rating System) Energy rating if it has one or will engage consultants to estimate one.

From there it explores how the energy rating could be improved to a minimum 4.5-stars out of a possible six – installing a new building management system or LED lighting for instance – and the cost of making the improvements. Pro-invest also aims for 5-stars where feasible under their arrangement with the Fund II CEFC policy.

“And then it becomes a fairly straightforward analysis from our perspective, because we then would take the cost element into consideration to reach a 4.5-star NABERS Energy rating,” Schaffer says.
Increasing the NABERS rating of an asset has its challenges. All assets are different and are assessed on an individual basis. The company weighs the cost of upgrades against the financial advantage of having a higher rated building and often things can change as the project develops but, Pro-invest believes the rewards are worth the effort.

All other things being equal, a 4.5-star rated building will have a higher valuation than a 2-star building, Schaffer says, with capitalisation rates (a property valuation metric) improving between 0.25 to 0.4 percentage points.

That’s just one of the financial benefits Pro-invest enjoys from having hotels with low carbon emissions.

More and more corporate clients are weighing a hotel’s NABERS rating alongside its traditional hospitality star rating and this is reflected in requests for proposals. For instance, a company might request 10,000 room nights in four-star hotels with a minimum NABERS Energy or Water rating of 4.5-stars. An increasing number of individual travellers are also seeking environmentally-friendly accommodation.

On top of this, the Australian Federal Government has implemented a mandate on Net Zero Travel, which means government departments must consider NABERS when booking accommodation. This puts Pro-invest another step ahead of its competitors, and Schaffer hopes it will accelerate adoption of NABERS across the industry.

Low emissions becoming the norm for financiers

Holding a portfolio of low emissions hotels also helps Pro-invest secure institutional investors. Schaffer says there’s been a significant shift in this regard in the past couple of years. A few years ago, assets that had strong ESG credentials could command a premium from investors, but these days it’s more of a baseline expectation than a bonus.

And similarly with financing, Schaffer says that while there still might be a small discount for bank loans for low-carbon assets, this will also become the norm and only low or zero emissions businesses will be able to achieve bank financing, which is lower priced than a lot of other loans.

Finally, Pro-invest expects those companies with better ESG ratings will pay lower insurance premiums, because they are lower risk.

Pro-invest has received support from institutions including specialist property lender Aareal Bank Group, Commonwealth Bank of Australia and the Clean Energy Finance Corporation.

The CEFC began its relationship with Pro-invest in 2018 when it provided debt finance to help Pro-invest build the Holiday Inn Express Melbourne Southbank hotel to meet a 5-star NABERS Energy rating leading to a significant reduction in energy use.

The CEFC has made an equity investment in Pro-invest’s Australian Hospitality Opportunity Fund II, which Pro-invest believes to be Australia’s first hospitality real estate fund to integrate energy sustainability in its investment criteria.

“Having an investor who is extremely well versed with regards to the latest ESG initiatives and possibilities out there is a definite advantage,” Schaffer says.