Looking to the Future with ESG at the Forefront of Mind

Pro-invest Group, NABERS and GRESB collaborated to explore what the future may hold for the Australia Hotel Sector in light of COVID-19.  Please see the highlights below or click here to download the full White Paper.

COVID-19’s Ripple Effects

The COVID-19 pandemic has had an enormous impact on economies, health systems, and on businesses large and small around the globe. During Q1 2020, much of the world came to a halt as COVID-19 spread across countries, devastating some of the world’s greatest cities. Nearly all industries took a hit and had to either temporarily cease operations or adapt and reform within a matter of weeks.

With the real estate sector directing much of their efforts on overcoming the impacts of COVID-19, it is understandable that many are concentrating on the here and now, and how to get business back to normal – whatever the new normal will be.  But as Australia takes steps to overcome the COVID-19 pandemic, several industry leaders are cautioning that addressing climate change during the economic revival phase should not be overshadowed.

Responding to the Implications posed by COVID-19

Currently, Australian policies have been framed to focus on the protection of people most immediately affected, while protocols to safely re-open economic sectors are being introduced in three phases:

  1. Connecting families and friends once again.
  2. Allowing slightly larger gatherings and more businesses reopening.
  3. Committing to reopening businesses and the community with minimal restrictions.

It is clear how the consequences of COVID-19 are being mitigated and industries are being looked after as an immediate response. From a long-term perspective, however, it is uncertain how the economic stimulus packages are to be distributed in the long run. It is well known that the impacts of COVID-19 will continue to be felt deeply and for a while to come.

Therefore, looking ahead to longer-term commitments and government responses, policy actions are expected to remain focused on further offsetting the economic downturn. Although it is noted that there also is an expectation for these efforts to support just and sustainable recovery plans, as stressed by institutional investors. 

With many industries and sectors around the globe having come to a standstill, the hospitality sector has possibly been one hit hardest due to strict limitations to non-essential travel and to group gatherings, as social distancing measures continued to be enforced. In Australia, the month of March 2020 marked a period of change like no other, as hotels were to cease trading as per the norm. By April 2020, hotels across Australia temporarily stopped operations, while many changed their operating models and opened their doors as quarantine hubs, supporting the Australian Government by offering “self-isolation” accommodation for people returning to Australia.

But Is There Light at the End of the Tunnel for the Hospitality Sector?

Hospitality has been considerably disrupted by COVID-19. However, from an investment perspective, hospitality is a long-term game and it is important to note that this impact will not necessarily result in a fundamental change but rather a temporary bump-in-the-road. At the same time, what was known as business as usual – pre-COVID-19 – is no longer going to be the case post-COVID-19. Hotels will need to adapt significantly, as all the services hotels generally provide will not be doable in a similar manner following the implications of COVID-19. As such, services across the guest’s journey will go under revision. For instance, standard practices for guest rooms will no doubt change drastically to ensure the possibility of a COVID-19 case spread is reduced to the near-zero likelihood, and breakfast buffets will need to be adapted to reduce the proximity and contact of individuals with the food items on offer.  However, such adaptations are encouraged to take sustainability into consideration wherever feasible and COVID-19 has presented an opportunity to rethink how the new norm will also be sustainable over the long run.

Consumption is a major consideration and addressing how hotels manage their energy consumption during these periods of low occupancy does not necessarily involve the latest technologies – although they do assist. Active management and clear monitoring practices are key in current times. Nonetheless, with resiliency frequently quoted as one of the hospitality industry’s key characteristics, hotels will get back out there and continue in rebuilding their strength.

Australia and New Zealand’s COVID-19 cases numbers have flattened significantly while their economies have already commenced down the path of recovery. The two countries have recovered far quicker than a lot of other markets and hence, hotel performance is forecasted to bounce back to some form of normality within the next year or two.

From an investment opportunity perspective, COVID-19 is anticipated to present strong market opportunities for existing hotels, new development and redevelopment prospects as many hotel owners are coming under financial stress. There are several distressed opportunities arising in the Australian hotel market and the Pro-invest platform allows investors to benefit from that. Markedly, those who invested through SARS and the GFC with hands on management with deep industry experience made some of the greatest investments in retrospect.

Sustainable Investment Avenues Under Demand

With COVID-19, NABERS insights demonstrate that companies are ever more conscious of sustainable finance right now. Those entering the market over the next 12 months may experience access to finance to be constrained and more competition. A demonstratable interest in sustainability will provide companies with a greater competitive edge in a particularly constrained market.  

During this time, it is important that investors engage with their investments to understand how they may be able to support them, as investors recognise this current crisis impacts their assets. The objective is to comprehend the challenges building owners and hotel operators are facing, coupled with the responses to these challenges, and how this impacts the investment portfolio.

Investors tend to take a long-term approach, with institutional investors being considered as crucial in the drive to accelerating the road to green recovery, as such a path will require the efficient and equitable deployment of huge amounts of capital. A further shift towards impact investing is also expected, as institutional investors and the like are anticipated to increasingly focus on investments that demonstrate and create solutions and generate positive environmental and social outcomes. With this in mind, c. A$28 billion worth of capital is already earmarked by Industry Super Australia to invest in real assets to generate jobs and assist in cushioning the economic hit from the pandemic.

Evidence of climate risk is compelling investors to re-evaluate core assumptions regarding modern finance. Investors are increasingly recognising that climate risk poses investment risk. While government must lead the way to a low-carbon world, investors have a fiduciary responsibility to ask good questions about environmental and social risk and resilience. In turn, real asset management companies have a responsibility to understand such risks and effectively communicate management actions to internal and external stakeholders.

Moving forward, investors will be challenged to determine not only the presence of management practices, but their quality and effectiveness as well. More than ever, investors will expect their real estate investments to demonstrate high standards of sustainability and transparency, aligned with the green recovery.

All-in-all, business as usual simply will not be enough. Instead, linking social issues to climate disruption and investments in resilience to safeguard the health of all industry stakeholders is likely to surface as the number one priority post COVID-19. The opportunity for the hospitality sector to address this has never been greater.

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