The REIT sector has been battered this year as the asset class faces a barrage of headwinds.
A combination of surging inflation and soaring interest rates has dampened sentiment for the sector, causing unit prices to fall across the board.
Despite the pessimism, many REITs continued to dole out steady distributions, fulfilling their role as effective passive income providers to income-seeking investors.
Hospitality REITs, in particular, have held up better than their counterparts in the commercial and industrial space.
CDL Hospitality Trusts (SGX: J85), or CDLHT, has seen its unit price inch up 1.7% year to date while CapitaLand Ascott Trust’s (SGX: HMN), or CLAS, the unit price is up 1% for the year.
Far East Hospitality Trust (SGX: Q5T), or FEHT, is the standout winner with an 8.5% year-to-date gain.
In contrast, industrial REITs such as Mapletree Logistics Trust (SGX: M44U) and Keppel DC REIT (SGX: AJBU) are down by 15% and 25%, respectively.
Seeing how the hospitality REITs are holding up, can they do much better in 2023?
Higher DPUs all around
The trio of hospitality REITs are reporting much better financial numbers this year as borders reopen and tourism resumes.
For the first nine months of 2022 (9M2022), CDLHT reported a 43.7% year on year jump in net property income (NPI) to S$82.6 million.
The hospitality REIT also saw its distribution per stapled security (DPSS) surge 67.2% year on year to S$0.0204 for its 2022’s first half (1H2022).
For CLAS’ third quarter 2022 (3Q2022), same-store gross profit excluding acquisitions soared 70% year on year, demonstrating a strong recovery for the REIT.
Back in 1H2022, CLAS saw its DPSS increase by 14% year on year to S$0.0233 while its revenue per available unit (RevPAU) surged by 60% year on year from S$60 per day to S$96.
FEHT did well too, with DPSS climbing 40% year on year to S$0.0154.
With DPSS showing a healthy rebound from the previous year, it’s no wonder that these hospitality REITs’ unit prices held up well.
Catalysts for doing better
Looking ahead, there are good reasons to believe that this performance can continue.
Just last Sunday, Transport Minister S Iswaran reported that a million passengers pass through Changi Airport each week, more than twice the number that passed through compared to April when borders were first reopened.
What’s more, the airport is well-equipped to handle this higher volume as Terminal 4 and the southern wing of Terminal 2 had just reopened on September 13 and October 11, respectively.
Singapore Airlines Limited’s (SGX: C6L) passenger numbers also paint a rosy outlook.
The airline’s passenger volume touched 2.4 million in November, up nearly eightfold from the same period a year ago.
The number of passengers has seen a steady climb from 1.45 million back in April.
China has also loosened its COVID-zero policy and is now facing waves of COVID-19 cases.
When these waves pass, its residents will be ready to travel once again, adding to the number of tourists going abroad for long-awaited vacations.
Many hotels have also rebranded themselves to capture higher tourist demand in the coming months.
Mandarin Orchard Hotel was rebranded as Hilton Singapore Orchard in February and is well-positioned for more growth in line with heightened travel demand.
The hotel, which is part of OUE Commercial REIT’s (SGX: TS0U) portfolio, will complete its ongoing refurbishment of 446 rooms by the end of this year.
Another nine new hotel brands are set to open in Singapore in the next two years, and the Singapore Tourism Board reported that the number of inbound tourists had catapulted from just 57,000 in January to 816,000 in November.
Not only are more tourists flocking to Singapore, but they are also willing to pay an average of S$280 a night, up from S$220 back in 2019, as reported by the Department of Statistics.
These statistics bode well for hospitality REITs as it shows tourists’ willingness to travel here and their propensity to spend more.
Risks on the horizon
Meanwhile, we cannot discount the looming risks posed by high inflation and the jump in interest rates.
REIT borrowing costs should creep up steadily while operating costs will also increase next year, thereby crimping distributable income.
There is the possibility that a recession may occur in 2023 as consumer demand is curtailed and people cut back on discretionary spending on vacations.
The current spike in demand can be attributed to “revenge spending” because people have been cooped up for far too long.
Once demand normalises and the effects of inflation and interest rates roll in, it could offset the current surge.
Get Smart: A year of two halves
We may see a year of two halves in 2023.
The surge in tourism and the lingering optimism should carry over into the first half of next year.
However, the risks mentioned above may rear their ugly head and give the hospitality REITs a tougher time.
Hence, investors should closely watch the numbers and commentary from the REIT managers to assess how they will manage these headwinds.
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Disclaimer: Royston Yang owns shares of Keppel DC REIT.