Still room for upside for hospitality Reits despite rally

THE rollout of the first vaccine this month heralds the start of a recovery for the hospitality sector, but have hospitality Reits already rallied too far ahead?

Units in Singapore-listed hospitality Reits leapt in November as news of successful vaccines by the likes of Pfizer/BioNTech and Moderna had investors betting that the green shoots were finally emerging for the tourism industry.

The availability of a vaccine will put hospitality Reits on the path to recovery in 2021, but a full recovery in revenue per available room (RevPAR) - an indicator of performance - may only materialise in 2022 or even 2023, some analysts say. It also remains to be seen whether business travel volumes will be adversely affected in the long-term by a shift towards virtual meetings.

Here in Singapore, vaccines will be widely available by Q3 2021, with sufficient doses for the entire country. However, unlike other markets such as Australia and the United States, the city-state lacks a big enough domestic market to offset the shortfall in tourists, which makes the lifting of border controls the real game-changer. The International Air Transport Association had projected earlier this year that international travel may only rebound to pre-pandemic levels in 2024, although the emergence of vaccines now offers some hope that this forecast may be on the conservative side.

With border controls firmly in place, the hotel sector in Singapore has been largely propped up this year by block bookings by the government to house those serving stay home notices (SHN) and quarantine orders; demand from those displaced by Malaysia's movement control order; and of late, staycationers.

The block-bookings of SHN and quarantine facilities, however, is expected to start tapering off from Q4 2020.

Thus, hospitality groups with exposure to countries with a sizeable domestic market are seen as benefiting from the recovery in domestic demand ahead of international travel taking off.

With the likes of Ascott Residence Trust (ART), CDL Hospitality Trusts (CDLHT) and Far East Hospitality Trust (FEHT) powering ahead in November, are valuations still attractive?

CGS-CIMB analyst Eing Kar Mei, who identified ART as a choice pick, reckons there is still upside for the hospitality sector, noting that the three Reits are trading below 0.9x price to book value. Even as the outlook remains somewhat cloudy, the market will price in a recovery ahead of the fundamentals, she told The Business Times.

Similarly, OCBC Investment Research analyst Chu Peng sees valuations as undemanding, singling out ART as a top pick with a fair value price of S$1.20. This comes on the back of ART's defensive portfolio with exposure to long-stay leases and geographically diversified footprint, which will allow it ride on the recovery that will take place in markets with domestic demand.

Nearly 70 per cent of ART's properties are also located in the Asia Pacific, which overall has been more successfully at containing the pandemic compared to the United States and Europe.

Meanwhile, DBS Group Research has raised its target price for CDLHT, FEHT and Frasers Hospitality Trust to S$1.40, S$0.70 and S$0.70 respectively. It has a buy call on all four counters, including ART (with a target price of S$1.25).

This is not to say there won't be challenges ahead for the hospitality sector, the biggest one being still depressed occupancies in the months ahead as tourism tries to claw back some semblence of normalcy.

And as recent developments such as the new, more contagious strain of virus in the UK has shown, the road to recovery may be fraught with bumps along the way.

Any pullback in prices should serve as an opportunity for investors to scoop up hospitality counters at a more attractive entry point.