Coming from a hotel asset management perspective and based on my empirical observations these last years, it seems to me that hotel values (both of existing properties and of development projects) dangerously ignore climate risks.

I believe that one main reason lies in the implied consequences of acknowledging climate risks in the valuation of new developments, which involves answering the question of its impacts on existing portfolio as well. In other words, including climate risks in capitalisation rates, discount rates and investment plans for new projects puts the spotlight on the inadequacy of existing properties and therefore on their overvaluation… a reality that investors still have a hard time accepting and dealing with.

Knowing that over a third (35%) of REIT properties are exposed to climate hazards [1] and 70% of assets will become stranded by 2030 based on their current energy consumption and real estate regulations [2], integrating these risks and creating adapted asset management strategies can become overwhelming. And yet, it doesn't look like a negotiable option to me as the consequences of climate change are going to affect hospitality real estate potentially even more than other asset classes because of their typical locations (islands, coastlines, mountains, old cities…).

I see potential solutions in (i) reviewing the assumptions we're using in our holy discounted cash flow method to value hotels, from the 10-year revenue projections and expense lines to the property improvement plan and (ii) generalising scenario analyses.

(i) 10-year projections need to take into account potential negative effects of increasing climate risk AND positive effects of adaptation strategies on demand, energy savings and resistance to climate change.

(ii) scenario analyses shall help compare the "investment as usual" scenario, recognising that a lack of proper investment will result in higher risk (reflected in the capitalisation and discount rates) and the "fit-for-purpose investment" which will account for higher initial and regular investments but also a higher resilience and lower risk.

I elaborate more on the "how" of these recommendations in this LinkedIn article (written in May 2023): https://www.linkedin.com/pulse/integrating-sustainability-responsible-hospitality-asset-wagner/.

The beautiful challenge for current hotel asset managers and owners is to find new leverages to create sustainable value and find this balance between investments, business resilience and asset adaptation.

When it comes to the question of developing new hotels in risk areas, my answer is the same as for for biodiversity hotspots: https://www.hospitalitynet.org/viewpoint/125000152.html (in short, yes, it should refrain from developing in these areas).

[1]http://427mt.com/wp-content/uploads/2018/10/ClimateRiskRealEstateBottomLine_427GeoPhy_Oct2018-4.pdf

[2] MSCI Pan European Property Fund Index 2Q 2023