The Rising Prevalence of the Asset-Light Model in the Hotel Industry

The asset-light model, where major hotel brands allow owner-investors to use their brand, has proven successful since its first implementation by Marriott in 1993. This model enables companies to expand without heavy capital dependence, thus presenting an attractive investment strategy in the hotel industry.

The asset-light model, characterized by a symbiotic relationship between major hotel brands and owner-investors, has become a prevalent strategy in the hotel industry. In this model, hotel brands permit owner-investors to operate under their brand while collecting a fee. Owner-investors invest their resources and efforts into the asset’s daily operations while gaining access to the brand’s customer base, loyalty programs, and the potential for strong returns.

Initially executed by Marriott in 1993, this model has proven successful for the world’s biggest hotel chains. It has effectively addressed the capital restraint on hotel company expansions, as the market gives a higher valuation to companies with less capital dependency for growth. This allows branded hotel companies to sell more stock, finance operations, use capital for short periods of time, reduce volatility, and expand their portfolios.

The asset-light model has allowed companies such as Hyatt to flourish. The company’s business model is more than 80% asset-light and has realized more than $5.6 billion in total asset disposition proceeds. By adopting this approach, Hyatt has been able to double its number of luxury rooms, triple the number of resort rooms, and quintuple the number of lifestyle rooms across its global portfolio.

The asset-light model also allows owner-investors to profit from the brand’s flag and the real estate on which it is planted. According to Zach Demuth, Global Head of Hotel Research for JLL, hotel real estate has appreciated about 20% to 25% in the past five or six years.

The asset-light model’s effectiveness can be attributed to its divide-and-conquer approach, viewed as a risk mitigation strategy. It allows owner-investors to offload some or all responsibilities related to owning and operating a hotel. In return, the owner-investor working with a brand reaps profits while the brand collects management or franchise fees, usually based on the hotel’s gross revenue.

Despite the benefits, the asset-light model comes with its own challenges, such as economic downturns, labor shortages, epidemics, travel bans, and additional operating costs. To address these challenges, hotel brands like Hyatt support their franchise owners and operators to drive topline revenue and owner profitability.

While the asset-light model presents a lucrative investment opportunity, potential investors are encouraged to conduct due diligence, particularly regarding long-term hotel management and operating agreements. These agreements outline expectations, obligations, and control duration, which can mitigate potential roadblocks.

The asset-light model’s flexibility, supportive role by some brands like Hyatt, and increasing acceptance by ultra-luxury brands make it an attractive strategy for investors. Industry data indicates a favorable environment for hotel investments, with hotel RevPAR increasing 8.1% and ADR rising 13.6% in 2022 compared to pre-pandemic levels. However, each investor must weigh the benefits and obligations to ascertain if the asset-light model aligns with their investment strategy. If not, they may consider becoming a shareholder in one of the major public hotel chains.

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