Asset-light way to higher profits


  • Business
  • Thursday, 29 Jul 2004

BY K.P. LEE

AIRLINES that don’t own a single plane; hoteliers who don’t build hotels; bankers without bank offices: a trend is developing among a growing number of companies which believe that freeing capital from assets like real estate and machinery can yield them higher returns. 

Being asset-light is “in” and, if not already being implemented, “monetising assets” is at least coming under serious study in the offices of more chief financial officers as they seek ways to meet shareholder expectations for higher returns on their capital. 

“There’s really been a shift in paradigm. Asset ownership was the old paradigm, but the new belief is that real estate consumes too much capital. It’s better – and probably cheaper – to rent someone else’s capital assets,” said Timothy D. Mayes, the global head of Citigroup’s real estate corporate finance division. 

The freed up capital could then be used to grow existing or new markets, yielding better returns and making more efficient use of corporate capital, he said. 

London-based Mayes, who was in Kuala Lumpur to speak at the Malaysian Institute of Certified Public Accountants’ (MICPA) business forum earlier this week, said the focus of companies on shareholder value creation had been one of the key drivers of this change. 

Meanwhile, equity analysts, using more sophisticated valuation methods like economic value added (EVA) and weighted average cost of capital (WACC), were increasingly expecting companies to focus on their core activities, and discounting those that were overly diversified, he said. 

“For a financial investor, the risk adjusted return of separately investing in a manufacturing company and real estate is better than buying into a company that mixes the two,” Mayes said. 

Timothy D. Mayes

With real estate investors generally having lower capital costs than corporations, there were arbitrage opportunities, he added. This has led to companies making more “buy versus rent” decisions even for what appear to be core assets. 

Having decided that corporate offices were not an efficient use of capital, global banks like Citigroup, for instance, already have a general policy of renting rather than buying their premises. “Ownership of premises limits operating flexibility,” Mayes said. 

The world’s biggest hotelier, Intercontinental Hotels, which currently owns less than 5% of the 3,500 hotels worldwide that carry its brand after starting a policy of divesting its assets three years ago, is but one example of what is now becoming the norm in the hotel industry. 

And the phenomenon that is happening worldwide is catching on locally, too. A growing number of public companies are starting to divest non-core assets; rather, entering into sale and leaseback arrangements. 

Even Bursa Malaysia is mulling over the possibility of selling off the building that houses the Kuala Lumpur exchange’s trading floor. Its chief executive officer Yusli Mohamed Yusoff said the exchange was in the process of considering which of its assets to monetise. 

“We are aware that we aren’t in the building management business,” he said at the MICPA forum, hinting at the possible direction forward. 

Or witness what next month’s initial public offering of KLCC Property Holdings Bhd, the country’s largest property listing, could be attempting to do. Although it is undoubtedly an opportunity for investors to own a piece of Kuala Lumpur’s most prized real estate, analysts say the divestment also allows parent Petroliam Nasional Bhd to concentrate on its core business as an oil company. 

Nevertheless, Mayes said, monetising assets such as real property was still in the early stages in Asia, although with higher land, values vis-à-vis other assets, the move could make sense. 

“There’s still a paradigm that it's cheaper to own than to rent; but the advantages in strategic, economic and accounting terms can easily be worked out,” he said. 

Despite finding obvious benefits, the emotional attachment to owning property would sometimes be one of the most difficult to overcome, Mayes added. 

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