The post-Covid run in hospitality Reits may look tired but don’t discount it getting a second wind

IT HAS been tough times for Singapore-listed real estate investment trusts (S-Reits), as high interest rates continue to weigh on distributions and investor sentiment remains dour amid the macroeconomic uncertainty.

While more than three-quarters of the trusts that disclosed distribution-per-unit (DPU) figures in their latest earnings reports posted year-on-year declines, the hospitality-focused Reits have bucked the downtrend.

The five hospitality trusts listed on the Singapore Exchange (SGX) posted an average growth of 21 per cent in DPU for FY2023.

Analysts, however, pointed out that the growth posted by hospitality Reits has mostly been due to a lower base since the Covid-19 pandemic.

Even so, the good run by hospitality Reits is set to slow in the coming year.

Market watchers have also been doubtful of the performance of the Reit sector as a whole, with some suggesting that more locally listed Reits could suspend distributions in the coming months amid a high interest rate environment.

Nevertheless, a confluence of factors ensures that it is worth remaining invested in hospitality Reits, even as analysts warn of headwinds for the broader Reit sector.

Growing visitor arrivals

Firstly, broader market trends and policy changes point to a continued uptick in travel demand.

While Chinese visitors have yet to return to Singapore’s shores at levels seen before the pandemic, conditions are in place for their return now that a mutual visa-free travel arrangement with China has kicked in.

Even before the arrangement was in place, a post-Covid high of 1.4 million Chinese tourists visited Singapore in January this year, making China the second largest source of tourists here.

This was on the back of growing visitor arrivals overall, with the number of tourists to Singapore up almost 16 per cent in January compared to the preceding month.

The success of mega concerts such as those by global music acts Coldplay and Taylor Swift earlier this year also demonstrates the pull that mega events have on visitor arrivals in Singapore.

The government is working to bring in more big events that could potentially boost visitorship to Singapore.

Deputy Prime Minister Lawrence Wong announced during his Budget speech in February this year that Singapore has set aside S$165 million over the next four years to bring in more major sporting events to Singapore. The Formula One Grand Prix in September this year is also likely to see visitor numbers grow.

Impending interest rate cuts

On the policy front, investors remain generally optimistic, with the US Federal Reserve expected to make several rate cuts this year as US inflation cools.

While the lowering of benchmark interest rates will help to lower the cost of borrowing of Reits overall, hospitality Reits in particular are set to benefit more with their lower gearing.

Under the Code on Collective Investment Schemes, S-Reits should not have total borrowings and deferred payments exceeding 45 per cent of the fund’s deposited property. A Reit may exceed this threshold up to a maximum of 50 per cent, if it has an adjusted interest coverage ratio of at least 2.5 times.

Based on their FY2023 financial results, the five hospitality trusts on SGX have a gearing ratio well below the limit allowed by the authorities, with their ratios ranging from 31.3 per cent (Far East Hospitality Trust) to 41.5 per cent (ARA US Hospitality Trust).

With the hospitality trusts recently completing their asset enhancement initiatives or acquiring new hotels both locally or overseas, they remain poised to see better returns when interest rates eventually fall.

CapitaLand Ascott Trust opened The Robertson House, along Robertson Quay, last October after a seven-month refurbishment, while CDL Hospitality Trusts re-opened Grand Copthorne Waterfront Hotel last August after a nine-month long renovation.

Undervalued sector

Investors, however, appear to have retreated from the hospitality hype post-pandemic.

The hospitality S-Reits, on average, are trading at a discount of about 38 per cent to their net asset values, according to Bloomberg data as at Mar 20.

In comparison, the industrial S-Reits are trading at an average 6 per cent discount to their book values.

With the draw of more mega events to come – as well as, perhaps, the long-awaited return of China tourists – it might be a good time to take a closer look again at the hospitality Reits.