Despite the outperformance, the hospitality sub-sector's average forward yield of 6.2% and yield spread of 4.1% remain the highest among REITs, while its price-to-book value (PB/V) remains reasonable at 0.98 times in comparison to the S-REIT average of 1 times, he adds.
In Natarajan’s view, hospitality is poised to benefit in the year ahead with key demand boosters including the opening of Changi’s new Terminal 4 (T4), which he projects to potentially add 5% to incremental visitor arrivals assuming 60% capacity utilisation in 2018. He also expects Qantas’ shift of its base back to Singapore, along with Norwegian’s Air commencement of its operations next year, to further impact visitor demand positively.
Another key growth driver would be the recent extension of Singapore’s Formula 1 (F1) leg for another four years.
“Anecdotal evidence points to near full occupancy for track side hotels during F1 week (15-17 Sep) and we expect positive spillover effects to be felt by other hoteliers in Sept [2018],” explains Natarajan.
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The analyst is also anticipating a rebound in the global economy next year based on data from World Bank’s June 2017 report, which projects global growth to strengthen to 2.9% over 2018-2019. In his opinion, this would in augur well for intra-regional corporate travel and should stabilise weakening corporate sector demand.
Lastly, Natarajan foresees a slowdown in the hotel supply pipeline over the next two years after its boom in compound annual growth rate (CAGR) over 2011-2016, which he believes should reduce competitive pressures. As such, he expects the hotel industry’s revenue per available room (RevPAR) to bounce back to 3-7% over 2018-2019, after declining 2-3% this year.
The analyst’s top “buy” picks as beneficiaries of these growth drivers are CDL Hospitality Trusts (CDL HT) and OUE Hospitality Trust (OUE HT), which have been given target prices of $1.70 and 83 cents respectively. He likes the former as what he deems the “most liquid proxy to recovery in visitor arrivals” while the latter is a key beneficiary with the opening of Changi’s new airport terminal, in his view.
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Natarajan has projected FY18 yields of 6.4% and 6.6% for CDL HT and OUE HT respectively.
As at 11.25am, units in CDL HT and OUE HT are trading at $1.60 and 79 cents.
