Green real estate Asia

April 04, 2024 •

5 min reading

The potential of green financing for hotel real estate in Asia


In the face of growing climate change challenges, the sustainability paradigm is rapidly reshaping business strategies worldwide. With hotel operations accounting for about 1% of global carbon emissions and embedded carbon in hotel construction adding another estimated 2%, the shift towards sustainability becomes an essential path for the hospitality sector. Particularly in Asia, the hospitality sector finds itself at a unique crossroads, as Asia is both a hotspot for tourism and a region acutely vulnerable to the effects of global warming. As hotel real estate investments flourish in Asia, there's a significant opportunity for investors, developers and other stakeholders to lead the green transition by tapping into the potential of green financing.

The green financing opportunity

Green financing refers to the funding of projects and investments that have positive environmental benefits, particularly those that address climate change and its associated challenges.

For the hospitality industry in Asia, which is experiencing remarkable growth, green financing presents a dual opportunity. Firstly, it offers a pathway to construct and operate hotels in an environmentally responsible manner, appealing to the increasing number of eco-conscious travelers. Secondly, by adopting sustainable practices through green financing, hotels can benefit from operational cost savings, potential tax incentives and a positive brand image, positioning them favorably in a competitive market landscape.

Green financing can also lead to a more favorable cost of capital compared to traditional financing mechanisms. Financial institutions and lenders globally are increasingly recognizing the value and lower associated risks of sustainable investments. This shift in perspective is often translated into more attractive loan terms for green projects, including reduced interest rates or preferential repayment terms.

For the hospitality industry in Asia, this means that by opting for green financing, not only are they making an environmentally sound choice, but they could also benefit from considerable financial savings in the long run, enhancing their bottom line.


Unleashing green opportunities in hotel real estate

Hotel real estate is often considered the riskiest real estate sector. This reputation stems from the income unpredictability with many short-term 'tenants' (i.e., hotel guests) and dependence on the shifting global tourism trends. This lead to fluctuating cash flows, as opposed to long-term occupiers providing stable revenue.

However, hotels are no less suitable for green financing than traditional assets. In fact, they may have some unique advantages. For example, hotels built with sustainability in mind can qualify for green financing through green construction certifications. Additionally, hotels are typically operated by a single entity, which gives them greater control over the building's emissions and consumption patterns than multi-tenant properties like offices and retail buildings. This makes it easier for hotels to implement energy-saving initiatives and reuse resources.

Hotels are also a diversified asset class that are often located in off-the-beaten-track locations and integrate into local communities. This gives them the opportunity to contribute to local employment, biodiversity, and other social and environmental causes, which can help them meet the "S" mark in ESG.

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Increasing appetite means increasing willingness for green premiums

There is a growing demand for sustainable hotels from both travelers and investors. Data from reveals that a majority, 71%, now prefer sustainable travel choices. Notably, this isn’t a mere preference. Many travelers are willing to pay a premium for green accommodation.

This willingness to pay has economic implications for the hotel industry. Research from Cushman & Wakefield indicates that hotels with high ESG standards could enjoy price premiums of 3-9%. Such data points underscore the economic benefits of sustainable investments in the hotel sector.

This dynamism also means that hotels have potential to thrive in green financing. ESG considerations should be more than just a compliance checklist; they must be at the core of strategic planning.


Leveraging green financing: Examples from Singapore

Asia is a growing market for green financing. A number of countries in the region, notably Singapore, have witnessed positive indications in green investment.

Even though the tourism industry came to a halt due to the pandemic, there is an increased traction for real estate owners and developers to opt for green loans. Between 2019 and the first half of 2020, companies in Singapore secured loans amounting to S$10.2 billion linked to green and sustainability initiatives, while S$4.8 billion in green and sustainability bonds were released from Singapore.

The redevelopment of the Pan Pacific Orchard, that reopened in June 2023, is a recent example illustrating the potential of green loans for a more sustainable hospitality industry in Asia. With the Green Mark Platinum certification from the Singapore Building and Construction Authority, the hotel secured a S$120 million (US$90 million) green loan. Such certifications can lead to architectural expansions, such as additional guest room floors and incentives to offset the costs of energy-efficient upgrades.

The Monetary Authority of Singapore (MAS) has set aside a commendable $15 million to foster its sustainable bond and loan schemes until 2028. Such initiatives not only highlight the growing importance of green financing but also solidify the region's commitment to sustainable growth.


Pathways for hotels to qualify for green finance

Despite the obvious advantages, many hotels in Southeast Asia aren't capitalizing on the "green premium". Discussions at the PHIST (Phuket Hotels for Islands Sustaining Tourism) Forum highlighted a prevalent underestimation of the green premium’s potential to lure discerning guests.

To tap into green financing, hotels can focus on both sustainable infrastructure and eco-friendly operations. This encompasses renewable energy sources, efficient water systems, waste reduction and sustainable sourcing.

Hotels constructed with environmental sustainability as a focus can qualify for green financing through certifications that recognize their green construction efforts. On the operational front, a hotel could benefit from a unified operator overseeing the building's energy consumption and emission patterns.

Moreover, for green financing to be effective, transparent and data-driven, monitoring is paramount. Such data-driven approaches will help in navigating transition risks and ensure hotels are not just meeting but setting new sustainability benchmarks.

The sustainability-focused shift in hotel real estate represents a broader global move towards marrying profit with planet-conscious actions. Asia, renowned for its financial and tourism sectors, is at a pivotal point in this evolution.

The trajectory of the industry will be shaped by its response to the expanding green financing opportunities. With dedication, informed data and expertise, Asia is well-positioned to spearhead the global transition towards a more sustainable hospitality industry.

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Written by

Assistant Professor of Real Estate Finance at EHL