3 biggest culprits behind hospitality REITs' poor performance in 2013

Will they bounce back this year?

According to CIMB, hospitality REITs in Singapore underperformed the S-REIT market in 2013, with an average return of -8.2% vs its peers’ -2.3%.

CIMB believes the relatively weaker performance could be a result of i) weak corporate spending, ii) intensified competition as a result of high supply of hotel rooms, and iii) weak foreign currencies, particularly for CDL-Hospitality Trusts (-9.0% total return in 2013) which has exposure to Australia and New Zealand.

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We expect hotel RevPAR to be flat in 2014. Add in the underperformance of 2013, average valuations of P/BV of 0.9x and yields of ~7.6% now, make the hotel REIT sub-segment our second most preferred segment, after the office space.

While we remain Neutral on REITs, we think hotel REITs are becoming attractive as demand-supply balances out.

Risks comes further out in 2015, if new tourism offerings do not deliver.

Demand-supply matching
2013 visitor arrival growth (+7.2% yoy) actually surpassed room growth (+6.7%), but RevPAR still dropped (-1.6%) because corporate spending and tourism receipts (+1.7%) growth was weak, dragged down by low Indonesian visitors’ spending (-3%).

The latter was the result of the weak Rp in 2H13. With the Rp stabilising, that is one positive for growth. Also, corporate spending is picking up. In 2014, room growth (+5.7%) will still exceed STB visitor growth forecast (+4.2%), but healthier tourist spending is the cause for our optimism on flat RevPAR.

..and stocks are cheaper
Meanwhile, the sector’s valuations have fallen to yields of 7.6% and 0.9x P/BV vs. CDL-HT’s trading range of 5-6% yield and 1.4x P/BV in 2010/11, when RevPAR was still growing but not at the breakneck pace of 2009.

Even if we back out the negativity of rising rates on the sector, CDL-HT is currently trading at a yield spread of 4.7% vs. historical average of 3.6%. Should RevPAR stabilise, getting back to average is not far-fetch.