Hospitality Reits to continue leading the way on return of China tourist dollar

INVESTORS counting on a recovery in the real estate investment trust (Reit) sector should look to the hospitality space to continue leading the way this year, analysts said. Although Singapore-listed Reits should post some kind of recovery, it will not be broad based.

The Singapore Reit sector was among the worst-performing sectors of the market in 2022.

As the year progressed, Covid-19 pandemic woes started to ease in most parts of the world. This should have been good news for Reits as offices, malls and hotels filled up. Investor appetite for Reits quickly waned, however, as central banks hiked interest rates to stave off decades-high inflation.

The result was one of the worst sell-offs in the 20-year history of Singapore-listed real estate investment trusts (S-Reits). Higher interest rates meant many investors were able to find high returns in safer plays such as government-backed bonds and treasury bills.

The iEdge S-Reit Index fell 16.4 per cent in the year and generated a total return of -11.9 per cent including distributions. For comparison, the Straits Times Index (STI) rose 4.1 per cent and generated a total return of 8.4 per cent.

Against this backdrop, only five of the 40 actively traded S-Reits – an asset class traditionally favoured by investors for its resilience and yields – managed to generate positive total returns.

More than half of these best-performing S-Reits with positive total returns are in the hospitality sector, as the reopening theme provided some relief.

Far East Hospitality Trust (FEHT), CDL Hospitality Trusts (CDLHT) and CapitaLand Ascott Trust (Clas) topped the chart, marching to total returns of between 6.7 per cent and 11.3 per cent in the year. The trio were also the only S-Reits to see their unit prices close off the year higher than at the beginning of 2022.

Analysts said the hospitality segment is likely to maintain its momentum this year.

“A rebound in tourism has helped hotel RevPARs (revenue per available room) to surge past the pre-pandemic levels. In fact, average room rates have risen to decade-high levels,” said Maybank analysts led by Thilan Wickramasinghe.

“Monthly visitor arrivals are about half of the pre-pandemic level; but longer periods of stay, inelastic demand and, perhaps, better yield management are boosting sector fortunes,” the analysts added.

“All this is happening in the absence of China demand, which will further boost the sector outlook.”

The way DBS analysts Geraldine Wong and Derek Tan see it, the “phenomenal recovery” of the hospitality sector in 2022 was also supported by domestic staycation demand and the return of MICE (meetings, incentives, conferences, and exhibitions) events.

“We observe that room rates were in the range of close to S$1,000 to S$2,500 per night over the Formula 1 weekend, and we believe that we are just seeing the tip of the iceberg for the MICE-led recovery,” they said, adding that Singapore hotel room rates are likely to remain “sky high” in 2023.

In addition to stronger recovery in MICE activity this year, Wong and Tan said other drivers include the return of corporate travellers with deeper pockets, longer lengths of stay for inbound tourists, and China’s reopening – especially from the second half of 2023.

At the same time, they said, supply remains generally muted.

Foreign S-Reits decline

The two other S-Reits that managed to eke out positive total returns were Sabana Industrial Reit and CapitaLand Integrated Commercial Trust (CICT).

Excepting Clas, all five of the best-performing S-Reits have the majority of their assets based in Singapore.

S-Reits with purely foreign-based assets were among the worst performers.

The US-focused S-Reits dominated the bottom of the table, as the double whammy of rising interest rates and a potential recession in 2023 shook investor confidence.

The US office Reits suffered the brunt of the sell-off, as Manulife US Reit , Keppel Pacific Oak US Reit and Prime US Reit grappled with the reluctance of employees in the US to return to the workplace post-Covid.

Units in the trio of US office S-Reits fell between 42.5 per cent and 55.2 per cent in 2022, with negative total returns of between 37.9 per cent and 52.9 per cent.

It was also a bad year for data centre S-Reits.

US-focused Digital Core Reit – the newest member of the S-Reit market, making its trading debut in December 2021 – saw its units sink 52.6 per cent, resulting in a negative total return of 51.3 per cent.

Keppel DC Reit , which has just under half of its assets under management based outside of Singapore, fell 28.3 per cent and saw a negative total return of 25.3 per cent for the year.

Another two US-focused Reits – United Hampshire US Reit and ARA US Hospitality Trust – were also among the biggest losers in 2022.

Retail-focused United Hampshire US Reit produced total returns of negative 25.1 per cent, while ARA US Hospitality Trust saw total returns of negative 27.4 per cent.

Improving outlook

Going into 2023, market watchers say ongoing downside risks to consensus estimates are likely to weigh on S-Reit performance in the near term.

They note that S-Reits are expected to report declines in distributions per unit (DPUs) in 2023 and 2024, due to the impact of macroeconomic headwinds.

Nevertheless, some see a “tactical opportunity” ahead when the Federal Reserve pauses its interest rate hikes.

“Historically, when the Fed pauses, S-Reits outperform the STI and Singapore banks,” said JPMorgan analysts Mervin Song, Terence Khi and Cusson Leung.

“During 2006-2007 when interest rate hikes ceased, S-Reits rallied 48.9 per cent versus the 26.9 per cent for Singapore banks and the 45.1 per cent for the STI. Meanwhile, over 2018-2019, S-Reits rose 14.9 per cent compared to 8.1 per cent and 8.4 per cent jumps in the Singapore banks and STI,” they added.

Agreeing, RHB analyst Shekhar Jaiswal said: “We believe the coming to an end of the interest rate upcycle, our bullish expectations of GDP growth in 2023, and the belief in a strong rebound in economic activity, especially in the second half of 2023, should make investors revisit the Singapore Reits sector, which delivered a dismal performance in 2022.”

The JPMorgan analysts say CapitaLand Ascendas Reit (Clar), CICT, Keppel DC Reit and the hospitality S-Reits are likely to be the most resilient, “owing to prior acquisitions and completion of developments or asset enhancement initiatives, as well as continued travel recovery, translating into stable or increasing DPU”.