Hotels in demand 0 comments

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The acquisition of nearly all the hotels under the Raffles Group by an American investment company, which was announced yesterday, has put the Singapore hotel industry in focus for once in a long while. The hotel sector used to be hot during the late 1980s and early 1990s when Singapore was in a property boom, the retail sector was strong and tourism was growing. However, in recent years, it has receded into the background as other growth pillars like manufacturing have taken over.

Yet the hotel industry in Singapore looks set to perform well for the next few years. It is at the confluence of three secular themes which I will outline below.

Firstly, the recovery of Singapore's tourism industry since SARS has been strong. Last year we achieved a record 8 million tourists, and this number is set to grow as discount carriers increase linkages at low cost, and as consumerism in Asia grows (see an earlier blog Consumer discretionary expenditure in a recovering economy) in tandem with their national economies. Already many hotels in Singapore are optimistic about occupancy rates growing for the next few years, and have raised their average room rates this year. This suggests higher profit margins in the coming years, especially since new supply of hotel rooms are limited for the next few years until the new IRs are built.

This brings us to the second trend which sees the Singapore government making a renewed effort to bring tourists into Singapore. It is clear that they now recognise that Singapore needs to create more service-based jobs and create strong domestic consumption, to keep jobs in view of the inevitable outflow of manufacturing jobs to cheaper locations; this transition has been seen in other developed economies like the US and the UK in the past. However since Singapore has a small population which has stubbornly refused to grow organically, a rise in domestic consumption can be achieved through more permanent immigration and of course, temporary tourists. Thus the huge investments made in the Esplanade and the planned (not one, but two) casinos (oops Integrated Resorts) coming up. The buzz surrounding the latter is likely to bring further attention to hotel stocks within the coming 2-3 years, although the expected increase in toursists might be offset partially by the increase in hotel room supply created by the new mega-hotels in the IRs.

Some might also remember reading about the third trend in the papers several days back. Because hotels are generally sitting on expensive land in the premium city area, developers are now looking at them with a renewed interest towards converting them into high-end residential apartments that can be sold off to interested buyers which does not seem to be in short supply despite the general stagnant housing market (one observes that the rich get richer). Already, hotels like The Marco Polo, Seaview Hotel and Cockpit Hotel have been bought over, torn down, and condominiums built in their place. Basically, this is a conversion from the yield-based earnings of hotels to the capital gains earnings associated with residential property developments. In addition, there are people who speculate that the current red-hot REITs theme in the Singapore market might spread to the hotel sector, allowing hotel owners to realise their property value and to concentrate on their hotel management competency. One should note that Singapore hotel stocks are typically trading way below their NTA, which means any such value realisation will potentially bring a windfall for the lucky investor.

It is possible that the American investor was eying the real estate that Raffles' hotels are lying on rather than the hotels themselves (of course, note that Raffles does not own some of the hotels, it just manages them). This is quite likely given the global property boom. Whatever it is, it definitely brings welcome attention back to the long-neglected Singapore hotel sector.