Hospitality: 2022 a better year

■ Despite the emergence of Omicron, we see greater travel demand this year on fewer restrictions and a strong desire to travel, backed by data points.
■ Singapore hotels should benefit from more VTLs, which boosted arrivals by 2-6x, while being supported by government contracts.
■ Hospitality REITs are trading below book value. Our sector top pick is ART given its higher exposure to domestic demand.

Travel continues to recover albeit at a slower pace

The sudden emergence of Omicron has undeniably delayed the recovery of the tourism industry. However, we remain optimistic that the industry will rebound and expect it to gather pace as soon as Omicron case numbers w ane. In our view , the world is now better equipped to tackle any new development in the pandemic. Unlike last year when the world went into total lockdown, the countries are less keen to impose strict measures this time round, thanks to the availability of vaccines, increasing vaccination rates. Furthermore, observations so far show that Omicron causes less severe illness as compared to other variants despite its more contagious nature.

Greater travel demand in 2022 driven by less restrictive measures

As we believe that the world is unlikely to enter a strict lockdown like in 2021, we see greater travelling activities and stronger RevPAR in 2022, which we expect to range from +30% to +100% yoy, depending on the location of the hotels. We see greater demand from both international and domestic travel as we project fewer domestic tightening and international border restriction measures this year as compared to last year. Data points show that travel activities (flight bookings, airline capacity, lodging and flights) and travel sentiment picked up months before the emergence of Omicron, especially in Europe, North
America and Latin America (Figs 7-13). These indicate a strong desire to travel, and we think that travel is highly likely to resume once the spike in Covid-19 cases settles down. Asia Pacific tourism recovery lags behind the rest of the world given the tighter Covid-19 restrictions (Figs 9).

Singapore VTL arrangements boosted arrivals by 2-6x

Singapore VTL arrangements boosted arrivals by 2-6x (Fig 19) and w e expect to see stronger arrivals from VTL in Dec 21 and Jan 22 as the VTL launched in Nov and Dec 21 represented a large 34% of the total arrivals in 2019. Assuming a small 5% of arrivals from VTL countries travel to Singapore, 50% opt to stay in hotels and the average length of stay is four days, hotel occupancy rate (excluding hotels under government contracts) would be raised by 5% pts. While this is not substantial, we think it is a good start. Based on Singapore’s VTL opening pace, we are not surprised if Singapore could fully reopen its borders by 2022, lifting industry RevPAR. We expect the recovery to accelerate from end2023 and achieve near full recovery by end-2024 (Figs 22 and 23). We believe that government contracts for the hotels are likely to be extended beyond 1Q22, limiting downside risk and providing support to RevPAR. While there were concerns that VTL arrangements would reduce staycation demand, our findings show that inbound travel
exceeded outbound in Sep and Oct 21 although departures spiked and exceeded arrivals in Nov 21 due to pent-up demand and year-end holidays (Fig 24). We believe that inbound tourism will increase and exceed outbound as Singapore establishes VTLs with more countries that are major sources of tourists.

Valuations remain attractive; top pick is ART

The hospitality REITs are trading below NAV at 0.75-0.86x. We see further re-rating on stronger RevPAR, which w e forecast to grow 20% yoy in 2022 and 35% in 2023 for the REITs’ hotels in Singapore. ART remains our preferred sector pick. The earlier and faster recovery of domestic travel vs. international travel (Figs 33-34) as well as in Europe and the US (33% of AUM) bode well for ART. Re-rating catalysts include faster-than-expected recovery and higher than-expected income top-up and vice-versa for downside risks.