Is Singapore hospitality heading to a pit stop?

Demand for travel into Singapore

Varied source of travel demand. Travel demand into Singapore is from a variety of sources, ranging from business, MICE travelers to leisure. Based on data from the Overseas Visitors Survey and the Singapore Tourism Board, we note that business travel/MICE showed a substantial growth in number of visitor arrivals over 2005 – 2009, making up c27% of total visitors in 2005 to 30% in 2008. The global financial crisis back in 2009 led to a slight dip in its  contribution to total visitors but was still a decent 27% of total visitors.

The opening of the 2 integrated resorts, apart from the attraction of the casinos and Universal Studios at Sentosa, come with expanded conference facilities. This further heightened Singapore’s winning formula, increasing Singapore’s capability to host larger and globally recognized MICE events, thus opening up opportunities to compete for larger, more globally recognized conferences. In fact, Singapore has hosted many major international MICE events in the past year not previously held on the island before.

Recent statistics for 2010 revealed that business/MICE travel visitors increased 21% compared to a year ago, and accounted for 27% of total visitor arrivals - in line with industry growth.

Near term visitor targets can be met

We believe that Singapore can meet its tourism targets for 2011. Visitor arrival growth has continued to break records since Jan. Latest statistics from Singapore Tourism Board show that Singapore saw 7.6m visitors over Jan-Jul 11 (+15% y-o-y), breaking prior year’s record of 6.6m. With the year-end holidays around the corner, we believe the industry is poised to meet the higher end of STB’s projection of 12m – 13m visitors for this year, which implies a maximum 12% growth compared to a year ago.

4Q11 will be another strong quarter largely boosted from the leisure front. With 3 months to go before the end of the year, we anticipate that the hospitality sector will continue to report strong growth in visitor arrivals underpinned by the seasonally peak year-end holiday season. In particular, we expect Universal Studios @ Sentosa to be one of the main crowd-pullers. Visitors can look forward to the launch of USS’s latest blockbuster – ‘Transformers –The ride’, which is an exclusive ride in Asia (one of three in the world, together with Orlando and Hollywood).

Moderating 2012 outlook

The outlook for 2012 however, appears uncertain at this juncture. Assuming that the current weak global economic environment continues to persist, we will expect travel demand to be affected. Hence, Singapore, being an open economy and business hub, can expect to see weaker prospects. Naturally, we believe that companies will be re-looking travel budgets and frequency of travel and tourists could look at cheaper alternatives for holidays.

MICE events and conferences are still expected to being held throughout the year. But new major attractions – Gardens by the Bay, West Zone (Equarius water park and Marine Life Park) and the new International Cruise Terminal - are expected to begin full operational only from middle of 2012 onwards and this could imply that growth in tourist arrivals would only likely get stronger towards end 2012.

Looking ahead, DBS economist is looking at a GDP growth of 5.0% in 2012 for Singapore, with Services sector continuing to remain robust. Given our limited exposure to US and the UK and our major tourist source markets being from Asia where economic performance is expected to be stable, our base case scenario assumes that visitor arrivals will continue to rise.

Base case scenario : 13.5m – 14.0m visitors in 2012. Based on 7% CAGR to achieve STB’s target of 17bn visitors in 2015, we project 13.5m to 14.0m visitors into Singapore next year, with stronger growth in 2H12.

Projected demand for 11.8m room nights in 2011 can be met; 12.0-12.4m room nights expected for 2012. The total demand for room nights generated in 7M11 is estimated at 6.2m (on the back of 7.6m total visitor arrivals), which is 50% of our full year target. Looking ahead, assuming that the average length of stay remains at 4.0 days and an average 4.5 persons/room, we estimate total demand of 12.0-12.4m room nights based on our estimated 13.5m – 14.0m visitors for 2012. This implies a 2-5% growth compared to 2011 and c.33% above the previous peak in 2007.

Room supply is expected to rise 6.0% in 2012; a 15% increase from 2010 to 2013. We believe the increase in supply of rooms will support the growing visitor arrival base in the longer term. Based on industry data, we note that hotel room supply is expected to increase by 2000-2200 rooms p.a. till end 2013, or an additional 15% by end of 2013.

However, given the moderate growth outlook in 2012, we expect the tourism industry to undergo a period of “gestation” in the short term when these new hotels ramp up operations.

In the coming quarters, given the shorter booking trends currently and more accommodation choices, we expect hoteliers to be more cautious in their pricing strategy,which could include keeping room rates flat or even dropping rates in order to attract demand.

Based on the performance of the Singapore tourism industry since 1995, we note that room rates typically grow/remain flattish when average occupancies are above 80%. Looking ahead, we expect occupancy rates to continue to remain above 80%, and therefore believe that there is little incentive for hoteliers to want to drop rates as demand is still relatively strong at this point.

Among the various hotel segments, we expect the mid-tier/ economy segments of the market to perform better compared to luxury hotels as they could benefit from the “trade down” effect from business travelers who might downgrade due to shrinking accommodation budgets.