| Attractive Exposure To Asian Hospitality |
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It is hard to expect discretionary spending to hold up at a time of high inflation. And for many consumers, leisure travel would be amongst the first to be sacrificed – no thanks to exorbitant airline charges and an uncertain global environment.
While many remain upbeat about Singapore’s tourism prospects in the long-run, the hospitality industry could face shortterm pressure. Evidence has been apparent in the latest figure from the Singapore Tourism Board (STB), which saw visitor arrivals in June drop 4.1 per cent year-onyear (y-o-y) – the first such decline since March 2004.
As hoteliers work to improve room rates while having to contend with lower occupancy, some hospitality players have emerged as standouts. Ascott Residence Trust’s (ART) serviced apartment which caters to corporate travellers has been one of the most stable income generators in the industry. For the second quarter of 2008 (2Q08), ART’s net property income rose 27 per cent y-o-y to $23.2 million, while distributable income also grew 10 per cent y-o-y to $13.3 million.
ART’s serviced residences, which are essentially a hybrid of hotels and apartments, are spread across 11 Asia-Pacifi c cities in seven countries – Australia, China, Indonesia, Japan, Philippines, Singapore and Vietnam. Its tenants include individuals on business trips or project-based assignments and expatriates.
Australia being the latest property injected into ART’s portfolio last year delivered one of the highlights of the Group’s 2Q08 results with RevPAU (Revenue per available unit) growth of 66 per cent. ART’s other markets which achieved higher RevPAU growth were Singapore (30 per cent), Vietnam (nine per cent) and Indonesia (seven per cent). Overall, RevPAU increased six per cent y-o-y to $143 million for the quarter, with occupancy rate at a signifi cant level of 82 per cent on average. WORLD’S ONLY PAN-ASIAN SERVICED RESIDENCE REITBusiness travellers tend to prefer service apartments to hotels, partly due to their fl exible lease terms that vary from a week to a year or even longer. While the hotel industry usually falls prey to seasonality, the longer lease terms of serviced residences have been able to provide a certain level of rental support.
“Compared with hotels, the longer-term leases of ART’s portfolio could cushion it against short-term economic shocks. We also believe corporate travel, the key segment that ART’s service residences target, is more resilient than leisure travel,” pointed out UOB Kay Hian’s analyst Jessica Zhang in a recent note to clients.
Tying-down its tenants on longer-term leases is part of a conscious business strategy for ART. Th e Group willingly foregoes capturing higher room rates for short-term stays, preferring instead to take in slightly lower charges for longer-term leases. In fact, ART allocates about 60 to 70 per cent of its room inventory for longer stays. Not surprisingly, the average length of stay for ART’s tenants is more than eight months – a trend which has provided income stability to its portfolio.
Though serviced residences are an attractive asset class and less subject to the cyclical movements of the property market, the segment has not been totally shielded from global economic headwinds. A case in point would be ART’s Philippines market which registered a four per cent dip in revenue that management attributes to business travel cutbacks relating to US sub-prime woes.
“We are more stable compared to those who depend more on tourism but that being said, the global slowdown has aff ected us slightly. Project-based travel has come down a little so we have to compensate by attracting business in other sectors,” says Chong Kee Hiong, chief executive offi cer of ART.
ART’s Japan market also saw lesser demand for service residences in 2Q08. Yet despite the decrease, support from 18 rental housing properties it purchased in Tokyo last year managed to improve revenue and gross profi t. Ninety per cent of the rental housing units have been leased out, providing a stable source of income.
“When we bought them, some people said, ‘hey, your serviced residences are high growth, why did you buy rental housing which you can only re-price every one or two years?’…but on hindsight, gross profi t and revenue for Japan improved drastically because we added stability to the Japan portfolio,” remarks Mr Chong. DIRECTION FOR GROWTHART’s portfolio now consists of an almost equal mix of developed and emerging economies, but future growth plans will see it lean towards the more yield accretive emerging markets such as Thailand and India.
ART’s sponsor, The Ascott Group, currently has six properties in various development stages in India and Mr Chong reveals that Th e Ascott Group’s fi rst Indian serviced residence would open in Chennai either by year-end or early 2009.
“India won’t need too long for rooms to be fi lled and yields to stabilise so we (ART) expect that once they open, within six to nine months we should be able to acquire it,” he says.
The presence of a strong sponsor in the form of the Ascott Group not only off ers operational support but also a potential pipeline of Asian serviced apartment properties for ART to inject into its REIT (real estate investment trust) offering.
“Besides India which will only be completed towards the end of the year, there are some properties in China as well which have just opened, so we’ll have to wait for them to reach a stable yield. All in, they (Ascott Group) have about $1 billion of assets in various stages of incubation,” states Mr Chong.
Rising interest rates and a tight credit environment have made lending much costlier and most REITs now tend to focus on organic growth rather than acquisitions. For ART, it is continuing with its asset enhancement activities in order to maximise property yields and maintain the overall quality of its portfolio. Recent asset enhancement initiatives included re-branding and refurbishing of its Melbourne property. It also introduced 73 new one-bedroom units in Ascott Beijing that were recreated from 35 larger apartment units.
While the Group is naturally more selective in acquiring assets at the moment, Mr Chong does not rule out further acquisitions so long as they are yield-accretive. Looking at its balance sheet, ART’s gearing ratio of 34.5 per cent puts it in a comfortable level to gear further should the need arise. Management has a gearing limit of 45 per cent, meaning that it has room to borrow another $300 million or so to fund acquisitions in the near term. OUTLOOK IN KEY MARKETSChina presents good potential for ART’s organic growth as the Group is confi dent that rents can be revised upwards in the near term. The management also believes profi t from its China properties in the second half of 2008 (2H08) should improve from the corresponding period last year and surpass profi ts in 1H08. It attributes this to the “penned up demand” in China as several business projects and trade events have had to be postponed till after the Olympics.
ART’s Australian market will also likely see rental growth on the back of stellar demand particularly from the booming mining industry, while markets like Indonesia, Philippines and Japan are expected to remain stable.
Touching on the prospect for Vietnam, management expects the market there to hold up well despite concerns of high infl ation and overheating of the economy. Vietnam currently contributes 17 per cent to ART’s gross profi t and Mr Chong cites the strong demand coupled with the lack of quality service apartments as some of the favourable factors there.
“Our occupancy level is in the high 90s, in fact it’s the strongest in our portfolio. Under the infl ation mode, my expenses go up but because of the strong demand, I would be able to price my rooms higher so that mitigates… and we’ve been pricing our rooms in US dollars so if there’s a devaluation of the local currency, it means that I’ll get more US dollars,” he says.
In Singapore, ART’s two properties will still be expected to lead the way in profi t contribution, with future growth drivers being the two Integrated Resorts and the expansion of the country’s MICE (Meetings, Incentives, Conventions and Exhibitions) industry which should further boost the occupancy levels of ART’s serviced residences.
The demand for ART’s serviced residence is underpinned by economic growth and foreign direct investment infl ows in the markets they operate in. While growth is expected to moderate this year, business environment in Asia-Pacifi c continues to remain positive. In fact, such resilience points to a region that would likely emerge even stronger from the current diffi cult times.
As a pure Pan-Asian hospitality REIT, that can only be a mouth-watering prospect for ART.
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