- Recent datapoints suggest that hospitality S-REITs are at the start of a convincing multi-year upcycle
- Spotlight returns to reopening in Asia with most markets slated to open in 1H22; hotel S-REITs to benefit with Asia the biggest revenue market at 42%-100% exposure
- Critical factor: close correlation between RevPAR and higher P/NAV, substantial potential upside as sector is still trading at -1 standard deviation of its P/NAV range
- Top picks: ART, CDLHT and FEH
Stars are re-aligning for hospitality S-REITs to deliver a convincing recovery trajectory from 2022. Singapore announced the re-opening of borders from 25 February and resuming all Vaccinated Travel Lanes (VTLs) – ahead of market expectations. Alongside the recently relaxed entry requirements on quarantine and testing, the stars are finally aligning for Singapore’s tourism sector. The hotel S-REITs first saw bright spots in 4Q21 with RevPAR at a 2-year high and we see them building on this momentum to deliver upside surprises through 2022-2023.
Time for Singapore to shine as borders in Asia reopen. Domestic travel markets are now ahead on the recovery track, with 4Q21 RevPAR at c.62% of normalized level, ahead of Singapore’s c.47% . We see the reopening theme rotating to Asia, as key Asian markets have reopened or are committing to open in 1H22. Similarly, Singapore should reopen to 65%-70% of its key visitor source markets by mid-22 and potentially reach 90%-95% if Greater China eases border controls. The stars are aligning for our hotel S-REITs with Asia as the single largest revenue market with exposure ranging from 42% to 100%.
Critical factor: RevPAR recovery and capital value normalization are key factors to monitor. The sector currently trades at 0.8x P/NAV (-1 standard deviation). We see opportunity for this to head higher given the close correlation between RevPAR and stock prices, driving a target P/NAV multiple of at least 0.9x. Furthermore, there is more potential upside as capital values are revalued up from currently 96% of normalized levels in 2019. P/NAV multiple on normalized book value of 0.78x will translate to a performance upside of c.15% to mean, or c.28% to +1 standard deviation levels, and on a compelling forward FY22F sector yield of 6.1%. Our top sector picks – Ascott Residence Trust (ART) and CDL Hospitality Trust (CDLHT) – are expected to benefit from both domestic and international recovery, while Far East Hospitality Trust (FEHT) is for exposure to Singapore tourism recovery.