Real Estate Giants Shift to Fee-Based Models: Goldman Sachs Highlights Investor Underestimation

New Delhi

Major Asian real estate groups are increasingly shifting from traditional property ownership and development towards fee-based asset management businesses in a bid to generate more recurring income and improve profitability, according to a Goldman Sachs equity research report.

Investors may be underestimating the earnings and profitability benefits of this transition, the report said, arguing that the market is not fully recognizing the potential improvement in returns and long-term growth that could come from asset-light business models. According to Goldman Sachs, the market has largely accepted the rationale behind these business transformations, with investor discussions now shifting from 'why they are transforming to how they will unlock the next phase of valuation re-rating.'

The report argued that investors are not fully recognizing the potential benefits of this transition. 'We believe investors underappreciate the magnitude of ROE uplift of 100-200bps over the next three years,' Goldman Sachs said. ROE, or Return on Equity, is a measure of how efficiently a company generates profits from shareholders' capital. A higher ROE generally indicates better profitability and capital efficiency.

The report explained that as the share of earnings generated from management fees grows, companies could become less dependent on cyclical property development profits and asset value movements. Goldman Sachs drew parallels with Brookfield, one of the world's largest alternative asset managers, which transformed its business model over the past 15 years.

The report noted that Brookfield's 'fee-related earnings grew 26x' between 2011 and 2025, with 'fee-paying AUM growth contributing 70% of growth, and the balance from fee rate and margin expansion.' According to the report, one of the key lessons from Brookfield's experience is that valuation increasingly shifts from being driven by the value of owned assets to being driven by earnings growth as fee-based businesses become larger.

The report further observed that companies with a higher contribution from fee-related earnings tend to generate higher returns on equity and command stronger market valuations. The report said Asia's real estate giants 'CapitaLand Investment,' 'Keppel,' and 'Hongkong Land' are moving away from traditional real estate businesses that require large amounts of capital and balance sheet funding, and are increasingly focusing on 'fee-based and asset-light fund management models.'

Under this model, companies earn recurring management fees by managing assets on behalf of institutional investors such as pension funds, insurers, and sovereign wealth funds, rather than relying primarily on owning and developing properties. The report added that mergers and acquisitions could also play an important role in helping fund managers scale up more quickly, citing Brookfield's acquisition-led expansion strategy as an example.

The broader implication is that as fee-based earnings become a larger share of profits, investors may increasingly evaluate real estate groups on the basis of earnings growth and recurring income streams rather than solely on the value of the assets they own.