Climate change has become the tangible – some might say inarguable – face of environmental, social and governance (ESG) theory as the world reels from a series of devastating events.
For hospitality investors, the issue is under the lens not only for a mounting range of real estate risks, but also due to the underlying centrality of climate in supporting tourism locations. This, in turn, is prompting a rise in climate metrics being applied in due diligence practices.
“Climate is at the centre of our decision-making process when we look at potential opportunities in the hospitality sector,” says Gabriele Magotti, chief investment officer of private equity real estate firm Invel. “We tend to look at local climate factors, not only over the short term, but also what the medium and long-term impact of climate change might be.”
In January, Invel partnered with hybrid hospitality operator YellowSquare to invest €200 million in acquiring, developing, and managing properties across Italy and other key cities in Southern Europe, with a target of managing over 5,000 beds. The Italian hostel brand already has existing properties in Rome, Milan and Florence. Magotti says that this partnership has all the hallmarks of Invel’s climate approach as part of its environmental, social and governance (ESG) strategy.
“Hostels are a very efficient model that can adapt very well to existing buildings,” he notes. “We aren’t doing ground-up developments but are focusing on the regeneration of dilapidated offices or other under-invested properties, which can be adapted to the format and layout of hostels. All this reduces the embedded carbon of the schemes as the physical structure remains the same, while we invest more in the FF&E and the mechanical engineering part of the building.” This in turn tends to suit the end-users of hostels, “who often travel by train” he notes.
“Hybrid hospitality has the lowest carbon footprint of any hospitality segment which is something we like.”
Climate extremes
Invel is also well acquainted with Europe’s climate extremes as a developer and owner of beach-front properties in Greece and Cyprus as well as mountainous ski resorts in Italy. The firm, alongside Prodea Investments, is currently executing a deep refurbishment of an iconic hotel in the Italian Alps, Hotel Bellevue Cortina d'Ampezzo. The €49 million repositioning will deliver a five-star luxury hotel, with up to 100 rooms, after the opening of the Milan-Cortina Winter Olympics 2026.
While Cortina is a well-loved and established resort, Magotti notes that climate change is affecting mountain destinations too. “I don’t think that the availability of snow will increase any time soon, and some Alpine resorts may suffer because of reduced precipitation,” he says. “Having said that, there is also an aggregation and consolidation within large Alpine resorts that are able to execute the capex required to sustain the different parameters in climate from one year to another.”
He suggests that while locations that can’t make key lifestyle and infrastructure investments may suffer, that won’t apply to the better supported destinations.
“We see a bright future for Cortina,” he affirms. “The season is becoming longer and longer, and we see a revival of interest from clients and operators in the summer season due to the better climate, that has become a very important part of the year for Cortina. In fact, we predict the location will follow a similar path to other Italian destinations that have achieved and maintained elevated ADRs.”
Olympic pressures
Invel’s investment committee isn’t alone in examining the outlook for Europe’s ski resorts. The International Olympic Committee (IOC) has been exploring climate modelling as they try to determine host cities which will offer sufficient snow and ice for the Winter Olympic Games over the decades to come.
Climate change has also become an area of concern for the Summer Games, with the recent fires in Los Angeles, host city of the 2028 Olympic Games, bringing new risks under the lens.
While the wildfires that tore through the city’s residential districts in January have already caused inestimable social damage, they are also expected to be the most expensive in history for the insurance industry. While Moody’s forecasts that “insured losses will run well into the billions of dollars”, many businesses, including the hospitality and leisure trade, are facing up to the prospect of insurers not only raising rates but refusing to renew policies in high-risk areas.
“Insurability is an increasingly important topic in the US market, where there is often more exposure to physical risk than in Europe,” notes Robbie Epsom, head of EMEA sustainability, CBRE Investment Management.
Johan Eliasch, a member of the International Olympic Committee, warned in a press conference: "The lesson from this is that we need to make sure that Olympics organisers have the capacity and capabilities to deal with extreme weather events, because it's not going to be less of it, it's going to be more."
While none of the Olympic venues were damaged by fires, including UCLA, which will house athletes, ongoing preparations for the event will now compete with rebuilding thousands of homes. Some $6.9 billion of investment earmarked for infrastructure, tourism and existing facilities – including an overhaul of the airport, LAX – may not be diverted but could be diluted amid changing priorities for city leaders.
European challenges
In Europe, intense rainfall in Spain produced deadly and destructive flash floods in the province of Valencia in October, damaging homes and infrastructure as people lost their lives. Although the disaster was described as a freak event, few think that it will be the last.
While local hoteliers weigh up how to prepare for such outcomes in the future, many real estate owners will look to the EU for guidance. Epsom sees EU taxonomy starting to address the climate change topic, particularly in the “do no significant harm” criteria. He also thinks that real estate owners will need to increase their dialogue with insurance companies, who are “probably further ahead than investment managers in terms of integrating physical risk into their analysis”.
For Ludovic Chambe, CBRE’s head of ESG and sustainability solutions for Continental Europe, while evolving legislation will probably provide both “carrot and stick” for climate due diligence, he sees building owners able to take some proactive measures. “We can implement measures like elevating buildings, reinforce foundations, install flood barriers, or move technical equipment from the basement to the roof,” he notes. “Landlords and occupiers are now seeking to includes such aspects in their ongoing business plans. After the recent floods in Valencia, a lot of our clients came back to us to discuss how they could future-proof their portfolios.”
Pricing in risk
One important topic in the whole debate is how climate change should affect real estate values going forward. Findings suggest that it isn’t being priced in at the moment – but all that could change.
Niel Harmse, vice president, MSCI Research, reports examining data from the MSCI Real Capital Analytics transaction database to see if there is a relationship between transaction yields and physical climate risk, using the MSCI Climate Value-at-Risk model. A primary analysis, looking at multifamily assets in the US, identifies only a marginal spread in transaction yields between apartment properties with a high or very high physical climate risk and those with a low or medium risk. Some high-risk assets, in fact, continue to attract higher valuations. However, Harmse notes: “The current market imbalance will likely not last indefinitely, especially as insurance costs continue to rise for higher-risk assets. But investors can get a head start by factoring in the growing impact of climate-related risks on property values and reshaping portfolios to reflect the threat from extreme weather.”
As the recent floods in Valencia showed, coastal and fluvial risk assessments are no longer sufficient risk parameters. A lot of the districts in the Spanish city hit hardest were subject to pluvial or surface water flooding, which often affects larger urban areas. Going forward, investors will need to account for all three. Harmse concludes: “Our analysis indicates that 1 in 10 properties (9.6 percent) faced at least a moderate risk of damage due to pluvial flooding, compared to 1 in 29 for coastal flooding and 1 in 91 for fluvial flooding. That’s putting significantly more properties at risk.”