Hotel investments lag despite operational improvements

Interest rates continue to slow transaction activity.

Singapore's hotel and hospitality market has seen a significant boost in operational performance but continues to lag in investments.

CBRE reported that investment transactions with the market have remained muted "as the prospect of higher for longer interest rates endure."

"The current elevated interest rates continue to slow transaction activity, however, buyer-seller expectations are narrowing," CBRE reported.

CBRE forecasts a 50 basis point drop in Singapore's swap rates in 2024, with subsequent rate cuts occurring after the first U.S. rate cut in the latter half of the year.

Meanwhile, CBRE also observed that investors are pursuing opportunities where they can extract value at the asset level, such as rebranding, refurbishments, and change of use.

For the rest of the year, CBRE noted that private investors will keep driving acquisitions, concentrating on luxury and upscale assets. 

"Investors will also target the emerging co-living market, which holds growth potential amid the significant shortfall in residential completions over the past five years," CBRE added.

Whilst investment within the hotel and hospitality market lags, CBRE underscored that Singapore enjoys deep liquidity and the best supply/demand dynamics in Asia-Pacific.

CBRE, however, warned that new supply will be extremely limited over the medium term, with supply growth estimated at a 0.6% CAGR from 2024 to 2027.

Over the past five years, Singapore's total room inventory has grown by just 4.6%, with the Upscale+ segment contributing 3,505 new rooms.

"Most new supply due to come to market comprises Upscale and Upper Upscale developments. With a lack of new hotel stock coming to market, Singapore will continue to see owners and operators reposition their assets through either rebranding, with a preference for lifestyle brands, or redevelopment into co-living or serviced residences." CBRE said.

CBRE attributed the declining supply to the significant increase in construction costs in Singapore.

CBRE, citing Turner & Townsend, stated that construction costs are expected to rise by 25% between 2022 and 2024.