After suffering from weakness in tourist arrivals and rising supply of hotels, the hospitality sector in Singapore seems to be on track for recovery this year. Several demand drivers are in place that will be beneficial towards the sector.

With visitor arrival growing 7.7% year-on-year (YoY) in 2016, the year to date (YTD) growth stands at 4.4% YoY (April 2017). In addition to this, there are several factors in place to drive the sector’s growth.

Supply and demand

Changi Airport is projected to open its Terminal 4 in 3Q17 and possibly bring an additional ~16 million passengers.

Assuming a utilisation rate of 60% of which 40% are new demand, it will translate to 3.8 million new visitors coming through Terminal 4. The increase in meetings, incentives, conferences and exhibitions (MICE) events in Singapore is expected to bring more visitors.

The main cause of the decline in hospitality industry previously was attributed to the surge in supply of hotel rooms from the opening of several new hotels. Signs of easing is showing after seeing a compounded annual growth rate of 5.1% in the past five years with another 5.9% expected for 2017.

Beyond 2018, hotel room supply growth should be kept around 2.3%.

Recovery in progress

With a slowing supply and increasing demand, hotel Revenue Per Available Room (RevPAR) is recovering after falling 12% since hitting a peak in 2012.

Hotel RevPAR has now recovered to 2008 levels and is well poised to see a rebound. In 2018 to 2019, it is expected for RevPAR to recover 3.0% to 5.0%.

Prolonged weakness in the industry has led to falling prices of hospitality REITs. Yield-to-date of the sector’s REITs is up 13% against SREITs 11.8 percent and STI’s 11.7 percent. The average dividend yield of hospitality REITs is currently at 6.3 percent.

CDL Hospitality Trusts

CDLHTSource: CDL Hospitality Trust, Bloomberg

CDL Hospitality Trust will gain from the increase in visitors through its six properties located in Singapore.

Should the recovery be not as expected, its exposure is limited through its geographical diversification with hotels located across seven cities. An additional property in a new city will be added from the acquisition of Pullman Hotel Munich two months ago.

The recent acquisition of the Munich property will be positively contributing to the yield of CDL Hospitality Trust. Currently, it is trading at a projected one-year forward yield of 6.6% (DEC-18F).

Analysts from RHB Research gave CDL Hospitality Trust a “Buy” call with a target price of $1.70.

OUE Hospitality Trust

OUEHTSource: OUE Hospitality Trust, Bloomberg

OUE Hospitality Trust’s Crowne Plaza Changi Airport is the only airport hotel connected to Terminal 3. As such, they might benefit substantially from the influx of new traveller arrivals.

The hotel is particularly popular with business travellers who wish to stay near the airport for convenience. Declining supply entering the market will be a driver of RevPAR.

For tourists, OUE Hospitality Trust owns the Mandarin Orchard Hotel which is popular for visitors as it is located in the middle of the Orchard Road belt. The mix of both tourist and business client segments gave it a good exposure to benefit from the growth in visitors.

Analysts from RHB Research gave it a “Buy” call with a target price of $0.78.