Why investors are not scared of Singapore hotels' weak operating outlook

2 hotels have recently been transacted at record prices.

According to DBS, the weak operating outlook for Singapore hotels has not deterred investors to gain exposure to the hotel sector in Singapore. It was reported that 2 hotels have changed hands at record prices. 

Grand Park Orchard hotel, including the retail podium, was reported sold to Bright Ruby Resources for cS$1.15bn. According to The Business Times, the company is linked to the China-based Du Family, with business interests in resources, shipping and property.

Here's more from DBS:

The freehold property includes a 74,000 sqft Orchard-Road facing retail podium. Assuming a higher valuation of cS$6,500 psf (DBSV assumes a cap rate of 4.25% for the retail portion given largely street facing shops, freehold asset), the 308-room hotel will be valued at close to a whopping S$2.1m/key or a net yield of c2.8%. 

Gallery Hotel, located along Robertson Quay is understood to have been transacted at cS$230m to RB Capital, who has been active in acquiring assets in Singapore for the past few years. This will imply a valuation of c S$1.03m/key. 

We believe that there is a certain premium attached to these hotels given their location, especially for Grand Park Orchard hotel, a rare piece of real estate in downtown Orchard Road. 

Gallery Hotel is in the rustic Robertson Quay area, but we note that there are competing hotels nearby, largely from CDL Hospitality Trusts (Studio M, Grand Copthorne Waterfront, Copthorne King’s). 

Prices paid for the hotels, in our view, has busted all previous records set this year – Ascendas Hospitality Trust acquired the Grand Park Hotel Clarke Quay for S$300m (implied S$900/key) and Far East Hospitality Trust acquisition of Rendezvous Singapore and Gallery Wing (S$264m or an implied S$728,000/key).

These transactions could also imply that valuations of listed hospitality players like CDL Hospitality Trusts (BUY, TP S$1.89), with a portfolio of hotels priced at an average of S$500,000-688,000 /key, is conservative.