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Phillip: Weak Tourism But Hospitality & Retail REITs Still Attractive
Aspire, Hot Picks | 26 June 2015
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By: Lim Si Jie
Articles (169) Profile

All Singapore REITs recently announced their 1Q FY15 results. The clear underperformer came from the hospitality sub-sector, whereby all four hospitality REITs missed forecasts in the latest quarter results.

This was largely due to the gloomy tourism sector, affecting both hospitality REITs and retail REITs. Although Phillip is not overly optimistic on the outlook for both hospitality and retail REITs, there are still valuable REITs that are worth investing, according to Phillip.

Tourism Market Continues To Be Gloomy

Tourist numbers is expected to register higher year-on-year numbers towards the later part of the year partly due to the low tourist numbers last year and the aggressive $20 million marketing campaign by Singapore Tourism Board (STB).

However, total yearly tourist numbers this year would not be much of an increase of last year’s, particularly because there is a lack of new attractions. Another reason is the strengthening of SGD against the Indonesian Rupiah, making it more expensive for Indonesians. They make up Singapore’s biggest tourist group by nationality.

Hospitality REITs Performance

Singapore hotel Revenue Per Available Room (RevPAR) continues to be impacted by a weaker tourism market.

The poor performance of Singapore’s tourism was due to a number of reasons:

  1. The absence of biennial events such as the Singapore Airshow

  2. Sluggish corporate demand and lacklustre tourist arrivals, especially Indonesians, whom typically book hotels at Orchard Road.

  3. Weaker demand from corporate clients for serviced apartments

Although occupancy rates for hospitality REITs were largely stable, RevPAR declined (for Singapore assets) between 3.9-11.0 percent year-on-year. Phillip believes that hospitality players have been offering promotions and cutting prices in order to boost their market share.

Hospitality REITs Outlook

Moving forward, the outlook for hospitality REITs remain challenging as the large supply of new hotel rooms expected to enter the market would intensify competitive pressures. Some near-term boost in revenue would come from upcoming events such as the SEA Games and activities organised to commemorate Singapore’s Jubilee celebrations.

Recommendation: Hospitality REITs With Japan Exposure

Buoyed by the weak Japanese Yen (JPY), Japan’s tourism sector remains vibrant with solid RevPAR figures. Ascott Residence Trust, Ascendas Hospitality Trust and CDL Hospitality Trusts recorded year-on-year RevPAR growth in 1QCY15 for their Japanese properties.

Low borrowing costs in Japan also provides a natural hedge to the REITs. Furthermore, hospitality REITs remain keen on exploring acquisition opportunities in Japan due to positive long-term prospects.

Ascott Residence Trust: BUY, $1.44

Ascendas Hospitality Trust: BUY, $0.76

Retail REIT Performance

Despite stifling issues such as manpower shortages and soft tourism figures, Singapore-focused retail REITs continues to remain resilient, having registered positive rental reversions and largely stable occupancy rates in 1Q CY15 . Rental uplifts ranged from 3.8 percent (Frasers Centrepoint Trust) to 17.5 percent (Mapletree Commercial Trust).

Retail REIT Outlook

However, Phillip expects retail sales to “remain flat” year-on-year, and will only pick up slightly this year. On top of that, interest rate hike expectations had been pushing the three-month Singapore Interbank Offered Rate (SIBOR) in March to its highest levels in eight years.

As such, consumer spending might see a significant decline. Although low inflation and low unemployment could provide some positives to retail, it is likely to be affected by the lower retail sales as a result of weaker tourist numbers.

Recommendation: Retail REIT With Overseas Exposure

Phillip’s strategy for retail REITs is to maintain exposure on resilient heartland malls in Singapore, especially those with little upcoming competing supply, i.e. Frasers Centrepoint Trust.

Frasers Centrepoint Trust: BUY, $2.27

Investors can also look at retail REITs that are able to capitalise on countries with growing middle class affluence/consumer spending power such as China and Japan.

Croesus Retail Trust is well positioned to benefit from the pro-growth Abenomics that was introduced to boost Japanese consumer confidence and wages, both of which are expected to stimulate consumption spending among Japanese consumers.

Croesus Retail Trust: BUY, $1.08

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

Ascott Residence Trust  1.300 -0.010 -0.76%   
Business: REIT invests in income-producing real estate assets which are used or predominantly used, as serviced residences, rental housing properties and other hospitality assets.

Insight: Apr-19, 1Q19 revenue increased 3% due to stronger ... Read More
Ascendas Hospitality Trust  1.080 +0.010 +0.93%   
Business: A stapled group comprising Ascendas Hospitality Real Estate Investment Trust and Ascendas Hospitality Business Trust.

Insight: May-19, FY19 revenue fell 6.3% to $190.5m while NP... Read More
Frasers Centrepoint Trust  2.690 -- --   
Business: Co is a developer-sponsored retail real estate investment trust.

Insight: Apr-19, 1H19 NPI rose 3.6% to $71.8m, as gross rev... Read More

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