Hotels in Singapore have enjoyed brisk business this year and are expected to continue to perform strongly as the government lines up a series of developments to meet its target of attracting 17 million tourist arrivals by 2015, up from 9.7 million in 2006.

The lofty goal promises a boon for the hotel industry, although analysts caution that rising development costs will affect yields, while the increased supply coming onstream may create a glut.

'Certainly, property prices are a concern and we have to also bear in the mind the increased supply coming onto the market over the next three years,' said Michael Issenberg, managing director of Accor Asia Pacific.

Europe-based Accor owns the Novotel and Grand Mercure brands in Singapore, with an Ibis hotel under construction and due to be completed in 2009.

'The reality of our industry is that it is cyclical and therefore we always need to be prudent in our forecasting,' Issenberg said. 'The industry must be mindful of not adding too much supply too quickly and to be very positive in terms of continuously building demand, as there are many other centres in Asia working hard to capture market share.'
Nonetheless, Accor is looking for opportunities to introduce its luxury Sofitel brand into Singapore, along with the new 5-star Pullman brand, and another 3-star Ibis economy hotel.

'The current situation is very healthy for Singapore and the fundamentals are good. Singapore has invested wisely in infrastructure, positioning the city very well as Asia's leading transit, tourist and financial hub,' said Issenberg.

Near-term room crunch
Singapore has experienced record visitor arrivals every year since 2004 and is currently facing a tight hotel room situation -- average occupancy rates reached a high of 85 percent island-wide last year, according to the Singapore Tourism Board (STB).

In the first ten months of 2007, average occupancy rates reached 87 percent.

DBS Group Research expects average occupancy rates to reach 90.3 percent by the end of this year and 93.4 percent in 2008.

There are currently about 37,000 available hotel rooms in Singapore and the government has made land available to make room for more.

'To meet the projected increase in tourist arrivals, the number of hotel rooms needs to be increased and STB is working with the Urban Redevelopment Authority (URA) to plan for and release adequate sites for hotel use annually under the Government Land Sales (GLS) programme,' said Caroline Leong, STB's director of travel & hospitality business.

Since August 2006, 14 GLS sites have been sold and will contribute some 4,800 additional rooms over the next few years to the current inventory, the STB said.

'In addition, STB is working with URA and the Singapore Land Authority to look into adaptive re-use of unoccupied state buildings that can be developed into hotels,' said Leong.

There are also the two integrated casino resorts, which are currently under construction. The resorts are expected to inject some 4,000 plus rooms in Singapore by 2010.

Tourism drive

Kim Eng Securities property analyst Wilson Liew believes there is unlikely to be a major oversupply of hotel rooms -- the increase in supply will be soaked up by the anticipated increase in tourist arrivals.

'The situation is not likely to ease up even as the two integrated resorts become operational, injecting some 4,300 rooms into the market by 2010. The STB estimated in June that there would still be a shortfall of 4,000 rooms (to meet its tourism targets),' said Liew.

Next year alone Singapore will see the opening of several new projects set to entice visitors to its shores. These include the Singapore Flyer, a giant Ferris wheel similar to the London Eye, and three new shopping malls to claim its stake as a shopping paradise.

The city-state will also host the Singapore Airshow - Asia's largest aerospace and defence show, and the inaugural FORMULA ONE SingTel Singapore Grand Prix, the first night race in the history of F1 racing.

'We believe the outlook remains very bright for the Singapore hotel market,' said Tom Monahan, senior vice-president for acquisition and development, Starwood Hotels (NYSE:HOT) & Resorts, Asia Pacific.

'Occupancies are currently at very healthy levels, there have been increased periods of 'compression' (when all hotels are running near or at capacity) and this has enabled citywide room rates to rise as well. We believe the outlook will remain bright for the coming few years as demand continues to outstrip supply,' he said.

Starwood owns the St Regis Hotels, Le Meridien, and Sheraton Hotel brands in Singapore.

'The URA land sales that we have seen in 2007, and the strong prices that are still being paid for hotel use, indicate the demand from developers and their confidence in the future,' said Tom Oakden, senior vice-president at property consultancy Jones Lang LaSalle (NYSE:JLL) Hotels.

The URA awarded 9 sites for hotel use this year compared to 1 site in 2005.

For the GLS in the first half of 2008, the URA has released 3 sites for hotel use for sale that can yield about 1,670 rooms. Another nine sites that can yield about 4,185 rooms have been placed on the reserve lists, where the sites will only be released for sale if a developer puts in an approved minimum bid.

3-Star sector to emerge

'While the government is making a great effort in making land available for developers, the prices are relatively high. As a result, it can be challenging for developers of hotels,' said Starwood's Monahan.

Jones Lang believes the economy class hotel market offers the highest growth potential in the current environment.

'Land prices have reached a very high level and add that to rising construction costs. Developers have to be very savvy and need to be very focused on the end product to achieve their returns. Economy hotels will allow them to put more rooms on the site then a 4/5-star property,' said Tom Oakden, Senior Vice President, Jones Lang LaSalle Hotels.

'The theory behind these hotels is that they work very well on the upturn as everyone needs hotel rooms and as well in a downturn where people still need to travel for business and people may not be able to afford 4/5-star hotels,' said Oakden.

Overall, Kim Eng's Liew believes the hotel sector still offers potential investors attractive opportunities.

'Particularly when policies are in place to ensure that Singapore's tourism infrastructure can help achieve and sustain the target visitorship,' said Liew.

'With supply still expected to be outstripped by demand, I expect room rates to continue to grow by about 15 percent annually for the next 2-3 years,' he said.