Skift, an intelligence platform for the travel and hospitality sectors, and Minor Hotels released on Dec 12 a report titled Asset Right: Rethinking the Balance Between Asset Light and Heavy Strategies, exploring the asset-light versus asset-heavy business models for the hospitality segment.
The hospitality industry has long favoured the asset-light model for its scalability and lower capital requirements. In some cases, the asset-light model has shown success.
For instance The Ascott, under CapitaLand Investment (CLI), has gone asset-light and is a major contributor to CLI’s fee income. Locally, Banyan Group has gone asset-light which has helped it shrug off its debt burden and report higher earnings. Marriott and IHG were early adopters, with other major chains like Hilton following suit and, more recently, Accor and Hyatt.
The report points out two challenges with the asset-light approach. The model depends heavily on consistently securing new management and franchise contracts to fuel growth and expansion. “This reliance can become a vulnerability in saturated markets, where the potential for signing new contracts can diminish due to high competition and market maturity,” the report cautions.
Secondly, continuously scaling up a business quickly can be difficult when the entity does not own physical assets. Also, entering new markets without physical assets poses challenges. The asset-light model often requires substantial local market understanding and strong partner networks to gain traction and build a presence effectively.
“Without physical properties, companies struggle to establish a market stronghold or influence local market dynamics, which are often driven by tangible, on-ground assets that symbolise commitment and permanence,” the Skift & Minor Hotels report says.
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According to A Differentiated Approach to the Asset-Light Model in the Hotel Industry, published by The Cornell Hospitality Quarterly, the asset-light model does not significantly impact hotel companies’ financial performance. However, being asset-light helps hospitality companies manage their risks better and enable them to grow in new markets without spending too much on buying properties.
The asset-heavy model, followed by Singapore developers and hoteliers before 2002, led to developers taking on considerable debt, which in itself became a challenge.
CapitaLand, the result of the merger of DBS Land and Pidemco Land, also had a debt burden that was solved only when it started its capital recycling strategy in 2002.
See also: Do developers need to be like CapitaLand?
On the flip side, the asset-heavy model involves significant investments in property ownership and direct management. This model gives companies full control over their properties and the overall guest experience, often resulting in higher service quality and customer satisfaction.
The asset-heavy model comes with its own set of financial burdens and often leads to considerable debt. “While leveraging debt can lower capital costs and potentially increase profitability, excessive debt has led numerous hospitality entities to bankruptcy,” the Skift & Minor Hotels report says.
“Reliance on property ownership increases exposure to market volatilities, such as economic downturns or shifts in consumer preferences, which can severely impact profitability,” the report adds.
The global financial crisis highlighted the dangers of high leverage within the asset-heavy model, as companies with extensive property holdings were disproportionately affected by real estate devaluation and reduced liquidity. During Covid, companies struggled with market volatility and drops in consumer demand.
“The financial instability that such crises cause underscores the need for debt management and risk assessment to maintain a sustainable asset-heavy strategy,” the Skift & Minor Hotels report says.
Perhaps the ideal model is somewhere in between. Hongkong Land’s management has articulated a capital recycling strategy to grow assets under management, and divest its development business. Whether it goes as far as CLI remains to be seen.
Elsewhere, Frasers Property has said it will continue with its current strategy of its investment properties providing around 70%–75% of recurring earnings, to be boosted by development profits as and when they materialise.
Since early 2022 when Covid had retreated, and following the conversion of CapitaLand to CLI in September 2021, the latter is down 12%; Hongkong Land is up 2% with most of the gain this year.
These stocks have lost ground: City Developments (–16%); Frasers Property (–9%); Ho Bee Land (–26%); OUE (–17%) and UOL Group (–19%).
