SINGAPORE (July 10): OCBC Investment Research is maintaining its “neutral” rating on Singapore’s hospitality sector.
Since the start of June to the close of July 9, hospitality Singapore REITs (S-REIT) under the research house’s coverage have posted negative returns, ranging from –0.9% (ART) to –5.3% (FEHT).
This compares to –5.8% for the STI, –9.1% for FSTREH, and –0.2% for FSTREI over the same period.
Nonetheless, OCBC’s top pick within the sector is Far East Hospitality Trust (FEHT), which is rated “buy” with a target price of 73.5 cents, with interest rate risks in mind.
In a Tuesday report, lead analyst Deborah Ong says, “Given that FEHT’s assets are concentrated in the mid-tier segment, we expect them to enjoy robust RevPAR growth in 2Q and onwards. Recall that FEHT’s hotel assets posted a 3.3% growth in RevPAR in 1Q17.”
RevPARs for Economy hotels have increased 13.0% in April, followed by 6.6% for mid-tier, 4.1% for luxury and 0.4% for upscale hotels.
The analyst expects mid-tier hotels to outperform upscale hotels in terms of y-o-y growth in the year, given the relative underperformance of the former last year with the many mid-tier hotels that came on-stream.
Although valuations within the sector are now more attractive, the key risk is the rising interest rates, and the impact of that trend on the dividend yields investors will subsequently demand from REITs.
Currently, the yield spread for FSTREI stands at 367 bps, about 1.1 SD below its five-year average, which the analyst deems as not attractive. The hospitality REITs under the research house’s coverage now range from 6.2% (CDLHT) to 6.8% (FEHT).
Visitor arrivals in 2Q increased 4.8% y-oy in April, according to figures from Singapore Tourism Board (STB), while visitor days also increased 2.5% during the same period.
Changi Airport’s statistics also appear to indicate decent pace of growth, with passenger movements up 5.1% y-o-y in Apr and 5.8% y-o-y in May.
As at 12.15pm, units in FEHT are trading at 62 cents.
