BEYOND COVID-19: HOTEL RECOVERY

Don't hold breath for fire sales by owners of Singapore hotels

Thu, Jul 09, 2020

Siow Li Sen


Singapore

SINGAPORE'S hotel business continues to be pummelled by Covid-19 with buyers on the sidelines waiting to pounce if owners throw in the towel.

Despite staycation offers, Singapore hotels are struggling, given their reliance on international travellers. Foreign visitors in May numbered 880; 1.49 million visitors was recorded in May 2019. In 2019, Singapore had 19.1 million visitors.

Still, investors may wait in vain if they are looking for fire sales, as Singapore remains attractive for regional and global travellers - who will resume travel once the pandemic is contained, say consultants.

Most hotel owners here are financially strong, so only those which are over-leveraged - and these are scarce - may have to slash prices by up to 30 per cent to attract buyers, said Govinda Singh, Colliers International executive director, valuations & advisory services, hotels.

"In the short term, we would expect valuations to drop mainly given the negative earnings outlook, and we would not expect this to be more than say 10 per cent for good quality assets," he said.

"However, the longer international travel remains limited, the more likely values will drop but again we would not expect more than a total 15 per cent drop, with a bounce back as travel resumes."

He added that, generally, it is not uncommon for hotel valuations to undergo steep drops of 20 per cent to 30 per cent, or for hospitality asset owners to fall into distress but cases in Singapore "tend to be few and far between".

"Therefore, it is unlikely that there will be masses of fire sales, with most owners and funders willing to play the long game rather than to sell cheaply unless they are forced to," he said.

But the current picture is a far cry from last year when hotels were in hot demand by investors.

Development charge (DC) rates for hotels spiked 45.6 per cent in the March 2019 revision. DC charges were unchanged in March this year.

Developers pay DC for the right to enhance the use of some sites or to build bigger projects on them. The Ministry of National Development revises the rates on March 1 and Sept 1 each year, in consultation with the taxman's chief valuer (CV). DC rates are based on the CV's assessment of land values and take into consideration recent land sales.

Some hotel transactions in late-2019 were Andaz Hotel at Duo and W Singapore at Sentosa Cove. Reports last year said CDL Hospitality Trust would buy W Singapore for S$324 million while developer Hoi Hup Realty had secured a S$332.5 million green loan to partially finance its S$475 million purchase of Andaz Hotel.

There were also cases of developers jumping on the hotel-conversion bandwagon being fuelled by the rise in hotel land values and a perceived shortage of hotel room supply on the island, according to a Business Times report in September.

Real estate transactions of hospitality assets in Singapore in the nine months of 2019 totalled S$1.65 billion, surpassing the S$1.2 billion for the whole of 2018. That in turn was a marked jump from the S$275.3 million in 2017 and S$145 million in 2016, based on figures from Savills Singapore Research.

Although the situation is pretty dismal now, owners aren't caving in because hotel yields in safe haven Singapore are comparatively tighter than the average across the region in relation to other commercial real estate assets classes, said Mr Singh.

"The majority of quality hotel assets remain tightly held while investment demand for hotel assets continues to be strong, particularly from institutional investors around the region," said Mr Singh.

He expects a rebound (over a 12-18-month period) in tourist arrivals post crisis as the fundamental growth drivers for the tourism sector remain largely intact.

Analysing the performance during Sars (severe acute respiratory syndrome) could provide some insights on recovery post-virus outbreak even though the level of impact of Covid-19 and Sars largely differs, said a CBRE Singapore hotel report.

The shock on Singapore's hospitality sector during the Sars outbreak in 2003 was short-lived, with performance rebounding to conventional levels within the span of five months, it said. Recovery in the subsequent year of post-virus outbreak was solid, with Rev/ADR (revenue/average daily rate) levels higher than the year prior to the Sars outbreak, it said.

CBRE also noted Singapore's healthy fundamentals will continue to remain on the radar of investors.

These include the well controlled hotel supply numbers, with an estimated 2,400 rooms in the pipeline up to 2022, and an annual growth rate of 1.8 per cent, which is lower than the 4.5 per cent per year between 2014 and 2019.

Investments have also gone into redevelopment works for Sentosa Island and Pulau Brani, expansion of the two integrated resorts, Mandai eco-tourism hub and a new tourism hub at Jurong Lake District from 2026 onwards.

Teo Junrong, CBRE capital markets associate director, said the closing of borders has definitely impacted demand, though the hotels here are still doing fine in terms of occupancy, supported by stay home notice cases and companies placing foreign employees in Singapore.

"Anecdotally, a number of owners whom we spoke to, especially those not in the luxury segment, are currently having occupancies in the 70-75 per cent range, although the ADR is much lower than before," he said.

"Hotel owners are still able to hold up due to the loan reliefs from banks and the government support with measures such as job support schemes and marketing partnership programmes, among others."

Mr Teo added that asset owners are still holding on to pricing and remaining optimistic, due to Singapore's strong fundamentals and a well-managed room supply outlook. "Hence, although there is a general increased willingness for discussions on offers, we don't expect to see massive fire sales in the hotel sector in the coming months," he said.

Shaun Poh, Cushman & Wakefield executive director, capital markets, said in the short term, hotel assets will experience some price weakness.

"A number of hospitality asset owners could be seeking to exit the sector in the short term as there is uncertainty over the duration of the crisis and when tourism will return to pre-pandemic levels. As the market finds its equilibrium, there may be some opportunity for investors on the sidelines to take advantage of the narrowing price gap between buyer and seller to enter the fray," he said.