Ascott Residence Trust

OCBC on 4 Sept 2012

According to CBRE, the potential supply of serviced residence units in Singapore is set to grow at 5.1% p.a. to 5,765 units by 2014. While this is higher than the rate at which hotel room supply is expected to grow over the same period (4.6% p.a., see our CDLHT report dated 120827), we note that occupancy rates for serviced residences in Singapore are stronger than for hotels in general. Serviced residences clocked average occupancy of 91.8% for 2011 (CBRE), versus an average of 86% for hotels (STB). We believe that ART’s Singapore properties will hold their own against upcoming serviced residence supply given their high quality, branding and good locations. We maintain a BUY rating but lower our fair value estimate from S$1.34 to S$1.30.

Upcoming serviced residence supply
According to CBRE, an estimated seven serviced residences with approximately 783 serviced residence units are expected to enter the Singapore market by the end of 2014. This would bring the potential supply to over 5,765 units by 2014, representing a 5.1% CAGR on 2011 figures. While this is higher than the rate at which hotel room supply is expected to grow over the same period (4.6% p.a., see our CDLHT report dated 27 Aug), we note that occupancy rates for serviced residences in Singapore are stronger than for hotels in general. Serviced residences clocked average occupancy of 91.8% for 2011 (CBRE), versus an average of 86% for hotels (STB), and thus should be able to deal better with increased supply.

Different contract signing pattern
ART’s Singapore properties were responsible for 18.7% of 1H12 gross profit. Having spoken to management previously, we understand that given the current uncertain economic environment, some corporates are effectively staying for the same duration as they did previously in the Singapore properties although they are renewing shorter contracts as opposed to signing longer contracts. While this may partially reduce visibility for ART, we note that higher average rates can be charged because of the shorter contracts.

Good locations
We believe that ART’s Singapore properties will hold their own against upcoming serviced residence supply given their high quality, branding and good locations. Somerset Liang Court and Citadines Mount Sophia are in districts which are not forecasted to see any additional supply between 2012 and 2014. While Dorsett Residence, to be located next to the Outram Park MRT, will provide some competition to Ascott Raffles Place, the latter has the superior location in the heart of the CBD. Given the Additional Buyer’s Stamp Duty, which was announced in Dec 2011, we expect that more non-residents may end up staying in serviced residences over time as opposed to buying their own residential units.

Maintain BUY
We reduce our fair value from S$1.34 to S$1.30 to reflect a weaker Euro but maintain our BUY rating.