CapitaLand Investment’s bet on return of travel to pay off

CapitaLand Investment (CLI) is banking on the resurgence of the hospitality sector, with its lodging arm The Ascott announcing this month that it is acquiring serviced apartment provider Oakwood Worldwide from Mapletree Investments for an undisclosed amount.

This will add some 15,000 units and 81 properties to Ascott’s portfolio. Of those units, 8,500 are operational and will boost Ascott’s recurring-fee income streams when the deal is completed in Q3 this year.

The deal also gives Ascott exposure to new markets such as Cheongju in South Korea, Zhangjiakou and Qingdao in China, Dhaka in Bangladesh, as well as Washington D.C. in the United States.

Once the acquisition is complete, Ascott’s footprint will span 150,000 units across 900 properties in 39 countries — putting it firmly on track to meet CLI’s target of 160,000 units under management by 2023, if not earlier.

CGS-CIMB analyst Lock Mun Yee said in a recent report: “In the longer run, this deal could expand Ascott’s network of asset owners and strategic alliances to drive growth, as more than 90 per cent of Oakwood’s asset owners are new to Ascott.”

Co-living is another area of focus for CLI — a move analysts say is just as much a diversification strategy into an adjacent space as it is an attempt at claiming first-mover advantage in an emerging trend. Aside from co-living, CLI has entered into the resilient long-stay lodging segments such as student accommodation and multi-family assets.

While still in its early stages, its co-living brand, lyf, is targeting 150 properties with over 30,000 units by 2030 to grow fee income. As at April this year, Ascott had 17 lyf properties with more than 3,200 units in 9 countries under its belt. Three more properties are slated to open this year.

The big story for CLI this year, however, is likely to be the recovery in the travel industry. As more countries pivot to endemic living, revenge travel has resulted in a surge in travel demand.

CLI’s lodging business is likely to emerge as a major earnings driver this year, following a turnaround in Q1 2022. Revenue per available unit (RevPAU) rose 34 per cent to S$71 from S$53 in the corresponding quarter a year ago, spearheaded by Europe and Singapore. China was an outlier, with RevPAU flat at S$68 in Q1 2022, and may continue to lag other regions in recovery after the recent flare-up in Covid cases prompted extended lockdowns in certain Chinese cities.

In Q1 2022, CLI’s lodging management segment posted a 31 per cent year-on-year increase in revenue to S$55 million, while its real estate investment business and fund-management business chalked up growth of 28 per cent, to S$403 million and S$132 million, respectively. Its property management business shrank 4 per cent to S$75 million.

RHB analyst Vijay Natarajan reckons the sharp pick-up in travel this year should propel the stock. But he also flagged emerging risks in the medium term: inflationary pressures, a challenging macroeconomic outlook, and a manpower crunch.

The shortage of workers has started to hamper travel’s return to pre-Covid levels; last week, for example, London’s Heathrow Airport limited the daily number of departing passengers to 100,000 in the wake of protracted delays, snaking queues and baggage issues. Understaffed airlines in the US and Europe have also axed flights as they struggle to rehire workers laid off during the pandemic.

And while pent-up demand means that people are willing to splurge on higher-than-normal airfares and hotel rooms right now, Natarajan said it remains to be seen how long this can be sustained.

Still, the cabin fever is real. Travel-starved consumers continue to head to the border in droves, eager to spend savings accumulated over the last 2 years. CLI’s latest bet on the hospitality sector will give it greater size and scale as the hospitality sector continues on its recovery path.