The REITs Pulsebeat - RHB Invest 2017-09-21: Hospitality – It’s Time To Take Off

The REITs Pulsebeat - RHB Invest 2017-09-21: Hospitality – It’s Time To Take Off Singapore REITs Hospitality REIT Sector CDL HOSPITALITY TRUSTS J85.SI OUE HOSPITALITY TRUST SK7.SI

The REITs Pulsebeat - Hospitality – It’s Time To Take Off

  • We reiterate our positive stance on the hospitality sector and expect 2018 to be a turnaround year, with growth drivers falling into place. 
  • Key demand boosters include the opening of a new airport terminal, increase in corporate travel, and more calendar events in 2018. Hoteliers are also set to benefit from a slowdown in supply, which should increase pricing power. 
  • Overall, we expect RevPAR to bounce back by 3-7% during 2018- 2019, after falling ~15% from its 2012 peak. 
  • Our REIT picks are CDL Hospitality Trust and OUE Hospitality Trust. 
  • OVERWEIGHT maintained.

F1 – wheels are rolling again till 2021. 

  • Singapore GP Pte Ltd and Singapore Tourism Board (STB) recently announced the extension of Singapore’s Formula 1 (F1) leg for another four years. The extension is positive for the tourism sector and hospitality players. 
  • Over the last 10 years, F1 has attracted over 450,000 international visitors to Singapore, and accounted for about SGD1.4bn in tourism receipts based on official data. 
  • The extension also comes on the back of a 19% YoY surge in average attendance in 2017. Anecdotal evidence points to near full occupancy for track side hotels during F1 week (15-17 Sep) and we expect positive spillover effects to be felt by other hoteliers in Sep.

Changi T4 could potentially add 5% incremental visitor arrivals. 

  • The new Terminal-4 (T4) is scheduled to commence operations on 31 Oct 2017 with nine airlines moving their operations there. 
  • T4 has the capacity for 16m passengers pa. Assuming 60% capacity utilisation in 2018, with 40% being incremental new demand and applying a visitor ratio (visitor arrivals/passenger movements) of 22% (same as existing) translate into 0.8m additional visitors (~5% increase). 
  • Additionally, we see positive impact to visitor demand from Qantas shifting back its base to Singapore, and Norwegian Air commencing operations.

Rebounding global economy – positive for corporate sector travel. 

  • World Bank, in its Jun 2017 report, noted that global growth is firming with growth expected to rise to 2.7% in 2017, up from 2.4% in 2016, before strengthening to 2.9% during 2018-2019. Growth in emerging markets and developing economies is predicted to recover to 4.1% in 2017, and reach an average of 4.6% during 2018-2019. 
  • Key drivers are a pick-up in trade and manufacturing activity. We believe this demand-led growth augurs well for intra-regional corporate travel and should stabilise weakening corporate sector demand.

Supply dynamics turning favourable. 

  • Hotel supply saw a CAGR of 5.1% during 2011-2016. For 2017, another 4.0% of hotel rooms is expected to come onstream (mostly in the upscale/luxury and mid-tier segments), which should exert some pressure on RevPAR. However in 2018-2019, the supply pipeline would be limited to 1.7% and 1.9% respectively, which should reduce competitive pressures. 
  • Overall, we expect RevPAR to decline by 2-3% in 2017, before bouncing back by 3-7% during 2018-2019.
  • Key near-term risks for S-REITs are sharp cutbacks in quantitative easing (QE) programmes by central banks, and a slowdown in global GDP growth.

Hospitality REITs valuations still attractive. 

  • YTD, hospitality REITs are up 16.4%, outperforming S-REIT’s 13.6% and STI’s 11.8%. 
  • Despite the outperformance, hospitality REITs’ average forward yields of 6.2% and yield spread of 4.1% are the highest among sub-sectors. 
  • The sub-sector’s P/BV of 0.98x is also reasonable compared to S-REITs average of 1x. 
  • Our picks are CDL Hospitality Trusts and OUE Hospitality Trusts.

Vijay Natarajan RHB Invest | 2017-09-21
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