Singapore REITs - UOB Kay Hian 2017-12-15: Hospitality To Shine In 2018

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Singapore REITs Recommendation SREITs Outlook 2018 CDL HOSPITALITY TRUSTS J85.SI ASCOTT RESIDENCE TRUST A68U.SI FRASERS HOSPITALITY TRUST ACV.SI

Singapore REITs - Hospitality To Shine In 2018

• We expect hotel RevPAR to turn around and rise 3-5% p.a. over the next three years, driven by a pick-up in room rates as occupancy inches towards 90% amid tight supply pipeline from 2H18. 
• Demand is expected to remain strong, supported by a cyclical recovery in business traveller numbers and Chinese outbound travel. 
• Prefer Singapore-centric hospitality stocks with CDREIT as our top pick. 
• Maintain OVERWEIGHT on the sector.

WHAT’S NEW

• Despite visitor arrivals growing steadily the past several years, demand growth has been eclipsed by an oversupply of rooms, resulting in four consecutive years of declining RevPAR. We believe the sector is poised for a turnaround, with decelerating supply growth alongside flourishing and sustained demand.
• Hotel supply is expected to increase by 4% in 2017 but taper off from 2018. Amid the benign supply outlook, we anticipate sustained momentum in visitor growth, backed by Chinese outbound travel and a recovery in corporate travel.

ACTION 

• Maintain OVERWEIGHT. We expect hotel RevPAR to make a turnaround and rise 3-5% annually over the next three years, driven by a pick-up in room rates as occupancy inches towards 90% amid tight supply pipeline from 2H18. 
• CDL Hospitality Trusts (CDREIT) is our top pick.

ESSENTIALS

Visitor arrivals to maintain steady growth of 3% p.a. 

• 2017 visitor arrivals are set to surpass 2016 historic high (16.4m), with 9M17 arrivals surging 5.1% yoy. Although 9M17 growth was lower than the 7.7% in 2016, the year 2016 benefitted from low-base effect (from a recovery in Chinese visitors which dipped in 2015). 
• According to World Travel & Tourism Council, Singapore could grow its visitor arrivals to 19.3m p.a. and generate receipts of S$34.1b by 2027. Over the next three years, we forecast visitor arrivals to grow 3% annually to reach 17.9m by 2019. Key catalysts include:
  1. Chinese visitor growth,
  2. recovery in corporate demand,
  3. Changi Airport Terminal 4, and
  4. increased air connectivity.
• The attractiveness of Singapore as a tourist destination is set to be enhanced, with the opening of Changi Airport Terminal 4 and Project Jewel (2019), STB-Walt Disney Tie-up for Disney Entertainment Activities (2019), redevelopment of Sentosa precincts (2017- 20), Mandai Makeover (2023), and ASEAN air and land links cooperation, EU-ASEAN Open Skies. A robust pipeline of MICE events (with eight large congresses and trade shows secured up to 2024) is also set to bring in an additional 20,000 visitors.
• Singapore’s main strength also lies in its well-developed infrastructure, and reputation for cleanliness and safety.

Demand driven by corporate demand and Chinese travellers. 

• We forecast demand for room nights to increase by an average of 4.8% p.a. to 15,684,077 rooms between 2017 and 2019, in line with the historical CAGR of 5.0% over the last five years. 
• Our forecast assumes the following:
  1. sustained visitor growth (+3.0% over 2017-19) supported by growth in Chinese outbound travel and returning corporate travel, and
  2. average length of stay (ALOS) to stabilise at 3.5 days in 2017-19, sustained by growing “Bleisure” travellers. 
• Chinese visitors emerged as the largest source market which surged 9.5% yoy on the back of robust demand for outbound travel in China and renewed interest in Singapore-Malaysia itineraries (after the MH370 tragedy and Sabah kidnapping cases in 2014).

Average length of stay (ALOS) to stabilise at 3.5 days, supported by corporate demand (and “Bleisure”).

• Average length of stay (ALOS) has fallen from 4.0 days in 2009 to a new low of 3.4 days in 2016. Our channel checks suggest that the influx of day-trippers to the integrated-resort casinos as well as shrinking corporate travel budgets led to fewer business travellers and shorter stays. 
• With green shoots of a global economic recovery, we believe business lodging (which softened in recent years) is set to rebound from the current low base. The rebound will likely bring in longer-staying visitors who want to build in extra nights into their work-travel itineraries.

Corporate demand. 

• While the corporate demand slack from O&G and banking was mitigated by fintech and online security consulting space, our channel checks suggest stabilisation in demand from the O&G and banking sectors as well. 
• According to World Travel & Tourism Council, business travellers (which accounted for 44.6% of Singapore’s tourism GDP) are estimated to see its travel spend grow 2.4% p.a. in 2017-27, supported partly by the proliferation of low-cost carriers in the region and importance placed on face-to-face meetings in Asia to cultivate relationships.

MICE (Meetings, Incentives, Conferences and Exhibitions) to boost rebound in corporate segment. 

• As a top MICE, Singapore is leveraged to corporate travellers (which account for about half of total arrivals). The city ranked first in the Asia Pacific and the Middle East (with 151 meetings as tracked by ICCA Statistics) in 2016. The sector is expected to continue benefitting from STB’s active support for business events. The corporate segment is also expected to receive a boost from MAS’s S$225m investment (by end-20) to put Singapore ahead as a fintech hub in Asia.
• As the fourth most visited destination (excluding Hong Kong and Macau) by the Chinese, Singapore is set to benefit from the influx of travellers. Singapore’s appeal is boosted by the extensive flight connections to China (direct flights to more than 30 cities), STB-led initiatives (partnerships with Chinese travel agents, promotions in 16 tier-2 cities etc), and sometimes macro events (such as diversion of traffic from Hong Kong and Taiwan, as well as Forest City property buyers, etc).

Benign supply outlook. 

• Hotel room supply is expected to see a net increase of 1,532 rooms in 4Q17 (61% of net new rooms coming on stream in 2017). Beyond 2017, supply growth is expected to decelerate to below 2.2% in the next three years. This is partly due to the URA tightening approval of applications for new hotels, backpackers’ hostels, boarding houses on sites not zoned for hotel use. 
• Additionally, no hotel sites have been introduced in the Government Land Sale (GLS) programme since 2014. Most industry players opined that the new supply in 2017 will overflow into 1H18 before turning better in the 2H18.

Occupancy to inch close to 90% levels. 

• We are upbeat on the hospitality sector in 2018 and expect occupancy to hit 89% in 2019. Hotel occupancy in 9M17 showed a healthy 1.3ppt yoy improvement to 86.3%. 
• Based on our analysis, the 89% occupancy projected for 2019 translates into 13.6m room nights.

Pick-up in ADR to drive next leg of RevPAR. 

• We believe there is still room for a recovery in ADR and RevPAR, where the 2016 numbers were still 10% and 12% below the peak levels in 2012. 
• For ADR, we estimate a marginal decline of 1% in 2017 (as the market digests the incoming supply glut in 4Q17), followed by a 5% increase each in 2018 and 2019 as hotel operators will have better pricing power due to higher occupancies reached. 
• Among stocks under our coverage, CDL Hospitality Trusts reported a 0.8% yoy increase in ADR to S$187 in 3Q17, its first significant increase since 4Q15.
• We forecast RevPAR to grow 3-5% in the next three years, driven by the pick-up in ADR.

Vikrant Pandey UOB Kay Hian | Loke Peihao UOB Kay Hian | http://research.uobkayhian.com/ 2017-12-15

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