• 2018 looks to be a good year
• 5.8% to 6.3% FY18 yields
• Potential catalyst: Gr. Southern Waterfront

SG RevPAR Growth From -1.4% to 8.0%

For the counters we cover, YoY growth in 3Q17 Hotel RevPAR ranged between -1.4% to 8.0% while 3Q Serviced Residences RevPAU – which is more dependent on corporate demand – fell 9.9% YoY for Ascott Residence Trust’s (ART) SG-based SR portfolios and 3.4% YoY for Far East Hospitality Trust (FEHT).

On the whole, 9M17 DPU growth ranged from -19.0% to 19.1% YoY while 3Q17 DPU ranged from -28.1% to 10.6%, with OUE Hospitality Trust (OUEHT) posting the greatest gain for both periods while ART was affected by the time lag between its rights issue and Ascott Orchard Singapore acquisition. Given the improving supply-demand dynamics, we are generally optimistic about RevPAR growth in 2018, especially the second half.

From our channel checks, there finally seems to be a slight pick-up in corporate demand, with more requests for proposals and corporate enquiries for function rooms and activities recorded. Yet, we do not find that unit prices of REITs under our coverage are compelling. Hospitality REITs under our coverage are currently trading at FY17 dividend yields of 5.3% to 6.3% and FY18 yields of 5.8% to 6.3%.

Potential Catalyst for Singapore Pure-plays?

We believe Singapore pure-plays OUEHT and FEHT stand to benefit the most from an uptick in either operational prospects and/or sentiment locally. Notably, one potential catalyst for a rerating could be an announcement of any upcoming lifestyle or tourist attractions within the Greater Southern Waterfront – a 1,000 hectare piece of land (3x that of Marina Bay) to be redeveloped.

While this is by no means a new story within the property space, the recent relocation of 500 staff from the Tanjong Pagar Terminal way ahead of schedule before the city port’s lease expiry in 2027 seems to have prompted a return of interest. With the considerable success of Marina Bay Sands and Gardens by the Bay, we believe the waterfront stretch could potentially be used to develop more than one medium- to large-scale lifestyle/tourist attractions. Nonetheless, given the scant details regarding the development as well as the highly uncertain timeline, we choose not to incorporate any upside into our model parameters until more concrete information is made available.

With or without the catalyst, OUEHT remains our favored pick within the sector. Given the currently rich valuations, we maintain NEUTRAL on the sector.

Source: OCBC Research - 1 Dec 2017