The REITs Pulsebeat - RHB Invest 2017-07-12: Hospitality, Ready For A Rebound

Singapore REITs S-REITs Outlook CDL HOSPITALITY TRUSTS J85.SI OUE HOSPITALITY TRUST SK7.SI

The REITs Pulsebeat: - Hospitality, Ready For A Rebound

Singapore Hotel RevPAR has fallen by 12% from its peak and is now back to 2008 levels. The bulk of this RevPAR decline was driven by the increase in hotel supply amidst an uncertain and weak demand over the last few years. With supply pressures easing by end-2017, hoteliers are expected to see some respite.
Additionally, demand drivers are emerging in the form of the opening of T4, a pick-up in corporate sector profits and sustained efforts to revitalise Singapore as a multi-faceted tourist destination. Thus, we expect 2018 to be the long-awaited turnaround year.

YTD, visitor arrival growth (Apr 2017) was 4.4% YoY after climbing 7.7% YoY in 2016. We expect visitor demand to remain healthy as we see catalysts in the form of the opening of Changi Airport Terminal 4 (T4) in 3Q17F, more meetings, incentives, conferences and exhibitions (MICE) events with 2018 being an even calendar year as well as signs of improvement in corporate sector multinational corporation (MNC) profits in tandem with the economic growth.
Overall, we expect visitor arrivals to grow at a healthy 5-7% in 2018, which bodes well for the hospitality sector demand.

In 2016, Singapore attracted 12.7m visitors by air (total visitors: 16.4m) compared to Changi airports’ passenger movement of 58.7m pa. This corresponds to visitor arrival/passenger movement ratio (visitor ratio) of ~22%.
The upcoming T4 has a capacity of 16m passengers pa. Assuming a 60% capacity utilisation in 2018, with 40% being incremental new demand translating into passenger throughput of 3.8m. Applying the same 22% visitor ratio on incremental demand, that would translate into 0.84m additional visitors, or ~5% increase in visitor arrivals.

Singapore hotel supply saw a CAGR increase of 5.1% over the last five years (2011-16). For 2017, another 5.9% of hotel rooms are expected to come on-stream with the bulk of it in the upscale/luxury and mid-tier segments.
However beyond 2018, the supply pipeline consists of only 2.3% of new rooms with very minimal set to open next year. Although some of the 2017 supply could be pushed back to 2018, we don’t see this as a threat.
The slowdown in supply should provide some relief for hoteliers that have been hit hardly by competition from deluge of new hotel openings in last five years.

After peaking in 2012, Singapore hotel RevPAR has been on an gradual declining trend and is down ~12% from its peak. While occupancy has remained relatively steady through the years, room rates has taken a hit.
With supply threats diminishing and demand expected to pick-up, we expect hoteliers to regain some of the pricing power.
Overall, we expect RevPAR to decline by 2-3% in 2017 and bounce back to 3-5% in 2018-19.

YTD, Hospitality REITs are up 13%, outperforming S-REIT’s 11.8% and FTSE Straits Times Index’s (STI) 11.7%.
Despite the outperformance, Hospitality REITs on average offer forward dividend yields of 6.3% (yield spread of 4.1%) and trades at a relatively cheap 0.9x P/BV.
Our Top Picks are CDL Hospitality Trusts (CDLHT) and OUE Hospitality Trusts (OUEHT).

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-07-12

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