Singapore REITs - RHB Securities 2015-09-01: Not Yet For Bottom-Fishing (Hospitality Sector)

Singapore REITs  Hospitality Sector 

Hospitality: Unexpected Flow Of Supply To Pressure RevPAR Further 

  • We downgrade the hospitality REITs sector to UNDERWEIGHT from Neutral as we see more headwinds in the remainder of 2015, mainly driven by the unexpected flow of hotel room supply this year, the strengthening of the SGD against other currencies, and a lack of catalyst to attract tourists. 
  • Despite Singapore hosting the 28th South-East Asian (SEA) Games for almost two weeks in Jun 2015, revenue per available room (RevPAR) for both CDL Hospitality Trusts (CDREIT SP, SELL, TP: SGD1.14) and OUE Hospitality Trust fell by 4.4% and 8.7 YoY respectively. This was no surprise to us as the smaller scale of the biennial multi-sport event tends to involve mainly the athletes and their families. 
  • Due to the abundance of new hotel supply in the market, RevPAR growth rate has been declining compared to those of prior years. As of May 2015, RevPar had fallen 7.4% YTD, while occupancy rates have been maintained at above 81% since 2014. To maintain healthy occupancy rates, hoteliers were pressured to slash their room rates so as to attract more tourists. As of May 2015, average daily rate (ADR) had fallen 5.7% YTD. 
  • Among all the segments within the hotel sector, we note that the upscale segment is still holding up relatively strongly, compared to the other segments. This may be due to travellers downgrading from the luxury segment to upscale and mid-tier segments, as we note a larger YTD decline in average occupancy within the luxury segment vs the other segments (88% to 84%). 
  • Overall, RevPAR within the sector was down as the challenging environment continues to persist – tourist arrivals are still on the decline, and the SGD is holding up strongly against Singapore’s top visiting countries. In addition, China has recently devalued its CNY, which we believe would eventually reduce the number of visitor arrivals in Singapore in a meaningful way. 
  • The latest reported figures from Singapore Tourism Board (STB) show that Singapore’s top-5 visiting tourists are still on the decline, with the exception of China and India. Despite STB’s target to hit at least 15.1m visitor arrivals this year, (which is also last year’s actual figure), visitor arrivals declined 4.1% YTD, mainly driven by a huge decline in Indonesian arrivals – down 13.6% YoY. Although we see a recovery in Chinese visitors, we are not overly optimistic on the comeback as the number of Chinese visitors in 2015 YTD is still significantly below pre-China’s crackdown on “forced shopping” in Oct 2013. Based on the latest figures, Chinese visitor arrivals in 2015 YTD are 25.1% lower than in Jan-May 2013, when a total of 1,074m Chinese visitors were recorded. 
  • Since the YTD recovery is still weak, and is far from its pre-crackdown years, coupled with the devaluation of the CNY, we remain pessimistic as to Chinese visitor arrivals to Singapore. 
  • Last, and most importantly, we note that in the latest CDL Hospitality Trusts’ 2Q15 report, there is an unexpected increase in supply in 2015 to 7.7% from 5.0%. This is mainly due to an unexpected early completion of Hotel Boss (along Victoria Street), which will yield a total of 1,055 new hotel rooms into the market. Although not closely-competitive with any of the hotels within our hospitality REITs coverage portfolio, the unexpected addition of over 1,000 hotel rooms is likely to pressure hoteliers to slash their room rates further so as to maintain their occupancy levels, in our view. 
  • We downgrade the hospitality REITs sector to UNDERWEIGHT, CDL Hospitality Trusts to SELL (from Neutral), and maintain SELL on OUE Hospitality Trust with a lower TP. As we continue to see headwinds for the hoteliers, which should put further pressure on the industry’s RevPAR, we reduce our TPs for CDL Hospitality Trusts and OUE Hospitality Trust to SGD1.14 and SGD0.73 respectively (previously, SGD1.55 and SGD0.78). 
  • On the demand side, we do not see any catalysts.

Ivan Looi | Ong Kian Lin | RHB Securities 2015-09-01
SELL Downgrade NEUTRAL 1.14 Down 1.55
SELL Maintain SELL 0.73 Down 0.78