The introduction of Formula One Singapore Grand Prix since 2008 and the opening of two integrated resorts in 2010 have transformed the tourism landscape in Singapore. Since then, tourism has become one of the key economic pillars and currently contributes four percent to lion city’s gross domestic product (GDP).
To remain a competitive destination, the government has embarked on a series of initiatives to reinvent Singapore as an attractive destination and a vibrant global city. These include JEWEL Changi Airport, mega expansions at Marina Bay Sands (MBS) and Resorts World Sentosa (RWS), additional two new parks and an eco-resort at Mandai Nature Precinct as well as an integrated tourism development at Jurong Lake District.
In addition, the government will also develop new tourism attractions at Sentosa, Pulau Brani and the Greater Southern Waterfront that will be seamlessly connected to the Southern Ridges, running from Kent Ridge Park to Mount Faber Park. Master Plan 2030 will transform Sentosa to a “day-to-night” destination with more after-dark activities. The new tourism attractions will likely to spill over to Pulau Brani as Sentosa running out of space with the ongoing expansions.
For the past 10 years, the growth in visitor arrivals expanded at a compound annual growth rate (CAGR) of 6.2 percent. It has consistently outperformed population growth of 1.5 percent. Meanwhile, the supply growth of hotel rooms is benign with a total 3,415 hotel rooms to be completed from 2019 to 2022. The growth in visitor arrivals is expected to be significantly higher, thus the limited supply of hotel rooms would not be able to accommodate demand. This could translate to an uplift to revenue per available room (RevPAR) over the next three years.
On top of that, Urban Redevelopment Authority (URA) pronounced in May 2019 that the use of private residential properties for short-term stay of less than three consecutive months remain illegal. This pronouncement has positive impacts towards the hospitality industry as it removes competition from alternative lodging when tourists visit Singapore.
Based on the above, UOBKH has a positive outlook for tourism in Singapore. The followings are UOBKH’s top picks for hospitality real estate investment trusts (Reits):
Far East Hospitality Trust
Far East Hospitality Trust has a portfolio of 13 properties consisting of nine hotel properties and four serviced residences with its retail and office only accounted for 19.7 percent of gross revenue in 1Q19.
In addition, Far East HTrust has a 30 percent stake in a joint venture for the development of three new hotels in Sentosa, namely, Village Hotel Sentosa, Outpost Hotel Sentosa and Barracks Hotel Sentosa. The three new hotels with a combined 839 guestrooms aims to cater to mid-tier markets.
In particular, with the short-term home sharing remains illegal in Singapore, this could bode well for the mid-tier hotels operators as mid-tier hotels are at a similar price point with private homestays which also target similar clientele, namely value-conscious tourist from China, India, Indonesia and Malaysia.
UOBKH ascribed Far East HTrust a BUY call with a fair value of $0.82 At the current share price of $0.69, Far East HTrust is trading at a price-to-book value (P/B) ratio of 0.79 and a forward-FY19 distribution yield of 5.6 percent.
CDL Hospitality Trusts
CDL Hospitality Trusts owns seven hotels in Singapore, which accounted for 62.5 percent of portfolio valuation as of 31 December 2018.
The major facelift of the Grand Ballroom and all the meeting facilities at Orchard Hotel was completed in March 2019. This will strengthen its competitive edge in the meetings, incentives, conferences and exhibitions (MICE) space, especially with the Grand Ballroom’s unique position as one of only four hotel ballrooms in Singapore with the capacity to sit 1,000 or more guests. A full rejuvenation of 260 bedrooms in Orchard Wing was completed in June 2019. Thereafter, the remaining 65 Club Floor Rooms is expected to be completed in 3Q19.
Meanwhile, in the Maldives, Dhevanafushi Maldives Luxury Resort was closed for a major renovation and rebranding into Raffles Maldives Meradhoo. In all, CDL HTrust will benefit from the ramp-up of the rejuvenated Orchard Hotel and relaunch Raffles Maldives Meradhoo.
UOBKH has a BUY call on the CDL HTrusts with a fair value of $2.06. The target price represents a 25.6 percent potential upside from the current share price of $1.64. Currently, CDL HTrusts is trading at a P/B of 1.1 times and a forward-FY19 distribution yield of 5.4 percent.