Property – Hospitality: Hotel RevPARs Bottoming out

UOBKayhian on 22 May 2014

We expect the Singapore Hotel RevPAR to stabilise in 2014 after a challenging 2013 due to: a) better corporate demand driven by higher MICE and business activities, b) a stable visitor arrival growth of 5%, and c) a 25% yoy drop in hotel supply to 2,300 rooms. We expect hoteliers with exposure to mid-upscale segment to benefit from the uptick in corporate demand, and CDL Hospitality Trusts is our top pick.

Hotel RevPAR stabilising, Expect a better 2014. Hotel RevPAR rose 3.4% yoy in 1Q14 after declining 2% yoy for 2013 (upscale: -11% yoy, mid-tier: -3% yoy) based on latest STB data. The growth was driven by increase in corporate demand due to increased MICE activities and the return of the Singapore Air Show (Feb). We are also encouraged by the stabilisation of RevPAR in mid-upscale segment (+1-2%) which saw a sharp decline of about 10% in 2013. Preliminary data from STR Global shows that April RevPAR rose 2.6%, driven by higher rates. Looking ahead, we expect RevPAR to see a modest 0-2% growth in 2014.

Hotel supply 25% lower than last year. In 2014, some 2,300 rooms, or about 5% of hotel inventory, are expected to come on-stream based on CBRE data. This is about 25% lower than the supply in 2013. Our demand supply analysis shows that incremental supply could be well absorbed by demand growth. We expect the hotel rates to slightly increase by 0-2% on the back of higher corporate demand and hotel occupancy is expected to stay relatively flat at 85%.

Visitor arrivals to grow 5% in 2014. For 2014, we expect a 5% yoy increase in visitor arrivals to 16.3m after a better-than-expected 7.4% growth in 2013. Our forecast is at the lower end of official STB estimates of 5-8% growth in 2014, leaving scope for upside. Visitor arrival growth will continue to be driven by the core five visitor markets (Indonesia, China, Malaysia, Australia and India), which accounted for nearly 56% of total visitors in 2013.

Hotel segment is the next to move after office; top pick is CDL Hospitality Trusts. We prefer hoteliers with exposure to mid-upscale segment as they will be a key beneficiary of the pick-up in corporate sector demand. CDL Hospitality Trusts is our top pick as it offers the best exposure to corporate sector growth with 60% of its revenue derived from corporate sector and the strategic positioning of its hotels along Marina Bay and Orchard Road.