Broker's take: OCBC sees 'some glimmer' at end of tunnel for hospitality S-Reits

OCBC Investment Research on Wednesday said Singapore's hospitality industry could see a "slow recovery" in the second half of the year, though outlook for the sector remains "challenging".

This comes amid government support on domestic tourism and as more countries exit from lockdowns, reopen temporarily closed properties, and implement "travel bubbles" barring the risk of subsequent waves of infections, OCBC said in a sector update.

In Singapore, hotel operators noted that contracts from the government are likely to last through the third quarter, which will continue to provide some buffer to revenue loss.

However, as the number of Covid-19 cases stabilised, there could be lesser demand from the government's bulk bookings, OCBC noted.

On July 3, the Singapore authorities announced that hotels may apply to reopen for staycation bookings, which could provide a boost to hospitality real estate investment trusts (Reits).

According to channel checks by OCBC, demand for staycation is healthy due to pent-up demand from local travellers, with average daily rates remaining largely comparable to pre-Covid-19 levels.

Nonetheless, staycation remains largely a weekend business and is unlikely to make up for losses in weekday occupancies and compensate for the income shortfall from Covid-19, OCBC said.

Going by the report, Ascott Residence Trust (ART) remains as OCBC's top hospitality pick due to its "strong financial position", as well as its "defensive and geographically diversified portfolio" amid a still uncertain outlook.

OCBC has a "buy" recommendation on the counter, with a fair value (FV) estimate of S$1.03.

ART was recently included in the FTSE EPRA Nareit Global Developed Index, which is a leading benchmark index for listed real estate investment companies and Reits. OCBC is of the view that this inclusion will further raise ART's profile as the proxy hospitality trust in the Asia-Pacific and increase its trading liquidity.

Within the Singapore-listed Reits hospitality sub-sector, OCBC's research team believes that Far East Hospitality Trust (FEHT) and CDL Hospitality Trusts (CDLHT) are likely to enjoy the most benefits from the Singapore government's support package and staycation business.

This is because FEHT is a "pure play on Singapore hospitality" and CDLHT has "significant exposure to Singapore", with 62 per cent of its net property income for fiscal 2019 contributed by the city-state, OCBC noted.

The research team has a "hold" call on FEHT with an FV estimate of S$0.51, and a "sell" recommendation on CDLHT, with an FV estimate of S$0.92.

As at 3.54pm on Wednesday, units in ART were trading flat at 89.5 Singapore cents. FEHT units were trading at S$0.55, up S$0.01 or 1.9 per cent, while CDLHT units were trading at S$1.08, up S$0.03 or 2.9 per cent.