• Recap of 1Q16 performance
• Negatives priced in
• BUY rating on ART

REIT yields between 7.3% and 8.0%

For the counters we cover, YoY growth in hotel REVPAR ranged between -6.9% to 2.4% for 1Q16, with most assets posting negative growth. OUEHT’s results were the most resilient as the 5- star Mandarin Orchard continues to enjoy pricing power and Crowne Plaza remains a choice venue for transit passengers at Changi Airport.

The generally weak REVPAR performance across the board is especially stark considering that the comparison is of an even-numbered year over an odd-numbered one; the boost from biannual MICE events such as the Singapore Airshow 2016 has been unable to offset industry challenges. Hospitality REITs under our coverage are currently trading at yields of 7.3% to 8.0%.

Persistent supply overhang

The total room stock increased 6.5% in 2015 and is expected to increase another 6.5% to 64.8K rooms in 2016. Last year’s increase in supply outstripped the modest increase in tourist arrivals in 2015 (+0.9% YoY according to STB’s preliminary estimates), and we expect this supply overhang to worsen this year.

Against the room stock of 61,723 at the end of 1Q16, 1,624 rooms are expected to enter in 2Q16, 140 in 3Q16, and 1,351 in 4Q16. For the year, 1,270 luxury/upscale rooms, 1,873 mid-tier rooms, and 787 economy rooms are expected to be added.

NEUTRAL rating on the sector

In our opinion, the hospitality industry outlook for the year looks to be a slight negative given oversupply and ongoing global economic uncertainties. Nonetheless, given the continuance of the same sector themes from last year, the negatives have had time to be been priced in and current yields look largely reasonable.

As such, we put a NEUTRAL rating on the sector while watching the market for opportunities as the prices fluctuate. Our top pick for the sector is Ascott Residence Trust (ART) with a BUY rating and fair value of S$1.29.

Source: OCBC Research - 18 May 2016