Singapore REITs Outlook 2018
Singapore Hospitality REITs
ASCOTT RESIDENCE TRUST
A68U.SI
FRASERS HOSPITALITY TRUST
ACV.SI
CDL HOSPITALITY TRUSTS
J85.SI
Singapore REITs - Hospitality Sees Revival From 2018 Onwards
- We expect hotel RevPAR expansion of 4-9% p.a. as occupancy inches towards 90% and boosts room rates. Backend-loaded 4Q17 supply was well-absorbed, with new luxury hotels sticking to their price aspirations.
- Amid a muted supply pipeline from 2018, demand is expected to remain robust supported by a surge of Chinese/Indian outbound travellers and returning corporate demand.
- Prefer Singapore-centric hospitality stocks with CDREIT as our top pick. Maintain OVERWEIGHT.
WHAT’S NEW
- We re-visited the hospitality space to assess the impact from the opening of seven new hotels in 4Q17, resulting in backend-loaded new supply (~69% of 2017 net-new rooms). The new supply showed hopeful signs of well-absorption, with new luxury hotels disciplined and patiently sticking to their price aspirations (in line with their global branding).
- Competition remains fluid and hotel incumbents we spoke to are staying vigilant and nimble to react. Starting this year, supply growth will also taper to below 2.5% p.a. for the next three years.
- Amid tight supply pipeline, visitor arrivals are expected to grow steadily on the back of growing Chinese/Indian outbound leisure travellers and returning corporate demand, led by the IT, pharmaceuticals, aviation, precision manufacturing and the government sectors.
ACTION
Maintain OVERWEIGHT.
- We expect hotel RevPAR to turnaround, rising 4-9% p.a. over the next three years as occupancy inches towards 90% and hotel operators see increased pricing power in the form of higher room rates. CDREIT is our top pick.
ESSENTIALS
Visitor arrivals to grow steadily (+3% p.a.) on global growth pick-up.
- 2017 visitor arrivals jumped 6.2% (vs 7.7% in 2016), creating another record year of new highs with visitor arrivals at 17.4m. The growth was attributable to a better-than-expected global economic recovery, continued growth in Asia-Pacific travel, increased flights and cruise connectivity to Singapore, and more in-market promotions. Our forecasts are within the Singapore Tourism Board’s (STB) forecast of a 1-4% increase in visitor arrivals.
- Singapore’s attractiveness is set to get a major uplift, with the redevelopment of Sentosa precincts (expected opening: 2021), makeover of the Mandai nature precinct to a rainforest-themed park (expected opening: 2023) and Jewel Changi Airport (early-19).
Robust demand driven by corporates and Chinese/Indian outbound travel.
- We forecast demand for room nights to grow by a CAGR of 3.2% to 18.9m rooms between 2018 and 2020 (slower than the historical CAGR of 5.6% over the last five years to reflect the higher base effect). Our forecast assumes the following:
- sustained visitor growth (+3.0% over 2018-20) supported by growth in Chinese/Indian outbound travel and returning corporate demand, and
- average length of stay to stabilise at 3.5 days in 2018-20, supported by “Bleisure” travellers who build in extra nights into their work-travel itineraries into the weekends.
- Arrivals from China and India surged by 12.7% and 15.9% y-o-y in 2017, and together accounted for 53% of the total visitor growth in the past year. Based on our channel checks, the bulk of the Chinese and Indian arrivals are leisure travellers in tour groups (which typically generate 10-20% less in room rates and are more volatile in terms of demand, compared to corporates).
Returning corporate demand in hotels and serviced-residences.
- For hotels, our channel checks suggest that more corporate activities are being planned, led by certain sectors like IT, pharmaceuticals, aviation, precision manufacturing and government sectors.
- For serviced-residences, growth has been led by oil & gas, manufacturing and online platforms. Most hotel players are also seeing a higher number of requests for proposals (RFP) and rates getting firmer (or have guided for stable rates forward).
- Demand for serviced-residences is also recovering from a low base, which has declined in the past few years due to a tightening in approvals for expatriate workers into Singapore, as well as cheaper competing substitutes (ie condominiums seeing declining rentals). We expect room rates to remain weak, as serviced residences continue on their discounting to bring in revenue.
Busy 2018 event calendar to boost corporate demand.
- 2018 is set to welcome more biennial events (which are held every alternate year), such as the Singapore Air show (with over 48,000 attendees in 2016), Food and Hotel Asia (with over 48,000 attendees in 2016), and OSEA (Asia’s largest oil and gas event with over 18,000 attendees in 2016).
- In addition, Singapore as the ASEAN chairman in 2018 will host more foreign delegates with events and meetings lined across the year, as well as other inaugural events, like Money 2020 Asia.
Hopeful signs that backend-loaded 4Q17 supply injection is well-absorbed.
- Seven new hotels (ie Intercontinental Singapore Robertson Quay, Sofitel Singapore City Centre, Courtyard Marriot at Novena, Andaz Singapore) opened in 4Q17, resulting in 2,221 net new rooms (~69% of 2017 new supply) coming on-stream. As these new hotels seek to gain a foothold (amid lower occupancies at opening), we may expect some short-term competition. However, our channel checks suggest that such competition was not too disruptive, relatively limited to properties in the vicinity of the new openings (ie Orchard area during 4Q17) and capturing mainly the free independent travellers (FIT) segment.
- In terms of pricing, many of the new luxury hotels have been disciplined and are sticking to their price aspirations (around S$300-350/per night range) in line with their international branding.
- Given that most corporate businesses are locked-in through the annual request for proposal (RFP), we believe that the corporate segment will continue to be insulated from pricing pressure in the near-term. The Singapore hotel market has also been accustomed to seeing its supply grow at a CAGR of 5% p.a. from 2014-17. Therefore, most industry players are cautiously optimistic that 4Q17’s strong materialisation of new supply can be well-absorbed without igniting a price competition over room rates.
Muted supply going forward.
- While hotel room supply has grown at 5% CAGR between 2014-17, this is expected to decelerate to below 2.5% in the next three years. The tightened new supply is partly due a lack of hotel sites introduced under the Government Land Sale (GLS) programme since 2014.
- Most industry players opined that they do not foresee more new supply in the next 3-4 years, due to competing land use (ie residential) and scarcity of land in Singapore.
Occupancies improving towards 90%.
- Hotel occupancy inched up by 1.6ppt to 84.7% in 2017, compared to the same period last year. We are optimistic towards the hospitality sector, supported by growing visitor arrivals and a tight supply pipeline. Our analysis shows that the 90% occupancy projected for 2020 translates into absolute demand of 21m room nights bought.
RevPAR expansion driven by ADR pick-up and higher occupancies.
- On the back of a global growth pickup, we believe that returning corporate demand and China/Indian outbound travel will boost arrivals, drive occupancies higher, and tilt pricing power back to hotel operators. For ADR (averaged daily rate), we estimate a slight increase of 3% in 2018. Despite earlier concerns of market digesting the supply glut in 4Q17, rates have held firm according to our channel checks.
- From 2018-20, we estimate ADR to grow between 3-5%. Among our coverage, CDL Hospitality Trusts also reported a 1.2% y-o-y increase in ADR to S$186, cognisant of the improved pricing power with higher occupancies. We project RevPAR growth of 4-9% in the next three years, driven by ADR pick-up and higher occupancies.
Vikrant Pandey
UOB Kay Hian
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Loke Peihao
UOB Kay Hian
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http://research.uobkayhian.com/
2018-03-15
UOB Kay Hian
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