Singapore hotel sector's two-year downturn finally comes to an end

Demand is expected to boost in 2018.

According to DBS reports prospects of an improving Singapore GDP and expected easing of supply pressures are estimated for 2018. The upside to Singapore GDP growth forecasts is projected to translate to stronger pre-leasing activities at various new office buildings and take-ups in the industrial space.

“We remain confident of recovery in office rents by the end of 2017/early 2018, which should act as a catalyst to help close the c.20% discount to book values for the office sector,” DBS said.

Regarding the hotel sector, DBS predicts that the end of the two-year downturn in the Singapore hospitality may be just around the corner. Going into 2018, new supply which has been an overhang is expected to materially decline (1% growth versus 5-6% over the past two years) and demand is expected to receive a boost from 2018 being a biannual conference year. DBS also reports increasing optimism from various hoteliers that Singapore is approaching a near-term cyclical low.

“Given already depressed valuations and relative illiquidity of the sector, we recommend investors to be early, rather than wait for evidence of a turnaround in 2018,” DBS said.

Whilst rising interest rates are a potential headwind to S-REIT performance, the wide yield spread at 4.2% which is in line with its historical average, provides a sufficiently wide buffer according to DBS. Despite two interest rate hikes over the past nine months, the S-REIT Index has generated a total cumulative return of 4.2% (6.8% on an annualised basis).