Fitch: Recovery is APAC’s hospitality property sector sustained in 2023

The recovery in operating cash flows will see real estate investment trusts (REITs) leverage improve across the Asia Pacific region, with the most significant recovery expected in the hospitality and retail sector, according to an analysis by Fitch Ratings.

Discussing the individual stocks, Fitch believed that the revenue growth would outpace rising labour and utility costs in the hospitality sector, which will benefit the most to REITs with exposure to management contracts, such as CapitaLand Ascott REIT and CDL Hospitality REIT.

Following this, retail landlords with shopping malls with exposure to regional travel and tourism may expect quicker cash flows rebounds which will help them mitigate challenges arising from growing e-commerce penetration.

However, the REITs which relied more on domestic traffic will find themselves under more pressure to reposition their assets towards a retail mix of grocery, food and beverage and leisure tenants in order to maintain the same levels of customer footfall.

At the same time, the rating agency said it believed that companies that own high-quality assets in key cities across Australia and New Zealand, such as Scentre Group Limited, remained “well-positioned to manage this transition”.

On a less positive note, some regional REITs with exposure to weaker retail properties, including Lippo Malls Indonesia Retail Trust, will find it much more difficult to retain customers.

“This is highlighted in the portfolio’s low occupancy rate relative to other APAC retail property peers. LMIRT is also exposed to an increased risk of a debt restructuring following material delays in its refinancing efforts,” Fitch said in a report.

At the same time, the expected demand for logistics assets in the region continued to remain high and was helped by positive structural trends including the growth in e-commerce.

Fitch expected that high tenant demand and tight supply of space in large cities will lead to strong rental growth prospects for Mapletree Logistics Trust.

“We expect the logistics sector to continue to benefit from positive structural trends, including increasing e-commerce penetration and the shift in focus towards supply-chain resilience,” Fitch said in its  report titled “APAC Property/REITs 2023 Sector Credit Outlook: Neutral”.

“Still, Fitch believes the supply of new assets in large cities will be constrained by the limited land supply and planning restrictions. This is driving market vacancies in the major cities across APAC to low levels and will lead to strong rental growth prospects.

“Lease lengths in the sector are typically market dependent, with tenants in most regions signing leases of between two and four years. The exceptions are in China, where tenants prefer shorter leases, and Australia, where tenants are comfortable signing longer leases.”