Hotel investment in CEE is rebounding but hotels must improve ESG credentials

Cushman & Wakefield and CMS present the key findings from the fourth edition of their joint report on the hotel investment scene in CEE: Getting Real about ESG in Hotel Real Estate.

Hotel investment is bouncing back

Hotel investment activity in the CEE-6 region reached EUR 464 million during the 12 months ending June 2023, despite a notable increase in financing costs and the ongoing economic and geopolitical challenges. This is 74% 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 million by the end of 2023, nearly 30% 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% in H1 2023.

Magsud Rahmanov, Head of Hotel Transactions, CEE & SEE, Cushman & Wakefield: “In the hospitality sector across the CEE-6 countries, transactional activity between H2 2022 and H1 2023 was boosted by increasing pressure on owners to dispose of or refinance their assets, and investors to deploy accumulated capital – but also by improving hotel performance. Despite lower occupancy than H1 2019, ADR growth lifted CEE-6 capitals' RevPAR above pre-pandemic levels in H2 2022–H1 2023, and the CEE region's upward trend is set to continue: while ADR growth will ease, rising occupancy will help sustain positive RevPAR momentum. The combination of stabilizing inflation, improving hotel performance and the return of international investors – particularly from Asia and the Middle East – will likely drive a further uptick in hotel sales over the next year. We have several deals in progress that confirm this trend.”

(Not just) Investors seek sustainable hotels

According to Cushman & Wakefield’s research, half of hotel investors in CEE already address ESG in their transaction due diligence, and 40% 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. Over 50% of investors encountered ESG-related challenges while conducting hotel acquisitions and disposals. For approximately 35% of investors, this resulted in significant financial consequences, surpassing half a million euros. In the CEE region, the surveyed hotel investors had not yet encountered such a major impact; however, 60% were exposed to non-financial or minor monetary issues (below EUR 500,000).

ESG as a benefit for business

For those who are proactive and take the lead in ESG, there is potential to increase the value of hotels by driving higher revenue, reducing utility cost, and enhancing attractiveness to investors with the expected “green premium” at 6% for hotels with the highest ESG credentials.

Based on Cushman & Wakefield’s research and experience with energy audits, 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% most efficient hotels had about 41% 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% of total revenue in H1 2019, increasing to 7.2% 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% increase. This reduced hotels’ gross operating profit in Eastern Europe by about 9.1%, and by 4.6% in the Czech Republic. Unsurprisingly, hoteliers are looking for opportunities to mitigate this impact.

Notable savings can also be achieved in water consumption. The CHSB 2023 Index indicates that the average water consumption for a sample of 28 full-service hotels in Warsaw, Prague and Budapest was ca. 520L per occupied room in 2021, while in the 25% most efficient hotels it was about 37% lower at 328L.

In addition, ESG as a standard used to measure a company’s long-term impact on the environment and society is important in the hospitality sector as it further supports talent attraction, innovation, brand value enhancement, and opportunities for better financing. Sustainable hotels can also get better commercial terms from operators. And, importantly, increasing EU regulation will also affect hotel owners.

Lukas Hejduk, Head of Hospitality, CMS: "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 of reporting on environmental, social and governance issues. 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."