• FY16 ended with RevPAR/RevPAU declines
• Trading at 5.8% to 7.7% yield
• Recovery expected in 2018

2016 Recap: RevPAR declines ranged from -5.3% to -8.6% for the full year

For counters under our coverage, YoY growth in hotel RevPAR ranged from -5.3% to -8.6% for FY16 and from between -6.8% to -10.5% for 4Q16. On the other hand, YoY growth in serviced residences RevPAU ranged from -3.0% to -5.8% for FY16 and from -0.6% to -2.3% for 4Q16. According to the Singapore Tourism Board (STB), industry-wide AOR, ARR, and RevPAR grew by - 0.9 ppt, -3.6% and -4.6% YoY, respectively. This compares to the 5.3% decline in RevPAR for the whole of 2015.

Looking at FY16 RevPAR trends by segment, the Luxury segment seems to have posted the most resilient performance with its - 1.3% drop while economy tier hotels performed poorest with a -5.4% drop. Overall, key data points to note for 2016 were the 4.3% increase in hotel room supply, 2.2% increase in visitor days (on the back of a 7.7% increase in tourist arrivals), and 2.0% increase in Singapore GDP in 2016.

2017 Outlook: Difficult operational outlook given weak corporate demand

Going forward, we expect leisure demand to show mild to no growth, with STB forecasting a 0% to 2% increase in tourist arrivals and a 1% to 4% increase in tourism receipts. Corporate demand is also expected to remain soft, with oil majors’ capex forecasted to recover slowly after last year’s decline. Furthermore, our channel checks suggest that some multi-national firms are taking a wait-and-see approach with regard to Trump’s policies before making business decisions (especially those involving longer-term commitments in expat hires).

For FY17, with a forecasted 5.9% growth in hotel rooms and tepid economic growth outlook, RevPARs are expected to continue their decline, and especially so for hotels that rely on corporate demand. In addition, with FY17 being an odd-numbered year, we expect the MICE events calendar to be less packed for corporates. However, RevPARs are expected to improve in FY18 given our projections of a better supply-demand dynamic.

Challenging year ahead before recovery; collect units on dips

Hospitality REITs are currently trading at 5.8% to 7.7% FY17F yield. Given the challenging operational outlook this year, coupled with the prospect of RevPAR/RevPAU stabilization next year, we encourage investors to buy into the sector on dips. Within the hospitality sub-sector in the REITs space, our top pick is OUE Hospitality Trust [BUY; FV: S$0.75], as we expect it to be buffered by inorganic contributions from its recent acquisition. Do refer to the S-REITs sector report dated 6 Mar 2017 for our top REIT picks across all sub-sectors. We maintain NEUTRAL on the hospitality sector.

Source: OCBC Research - 16 Mar 2017