Hospitality stocks expected to end year on gloomy note

Revenue hit by fall in business travel; analysts expect reversal in 2018, barring a recession

Hospitality stocks will end the year on a downbeat note in the wake of a drop in business travel, according to OCBC Investment Research.

Although the number of tourist arrivals was up 10.3 per cent in the period from January to August compared with the same period last year, "corporate demand has been tepid", wrote analysts Deborah Ong and Andy Wong yesterday.

The result has been a 2.7 per cent fall in revenue per available room compared with that period from last year.

The five hospitality trusts covered by OCBC recorded poor numbers in third-quarter distribution per unit compared with the same period last year.

Growth ranged from -2.5 per cent to -7.4 per cent after adjusting for one-off items and equity financing while revenue per available room for the five trusts was also down, from -5.8 per cent to -7.8 per cent.

  • 10.3%

  • Rise in tourist arrivals in the period from January to August, compared with the same period last year.

  • 2.7%

  • Fall in revenue per available room, compared with the same period in the previous year.

The analysts noted that October was a particularly poor month for hotels so this quarter could also fall flat.

They cited a decrease in the number of exhibitions organised by the oil and gas sector, as well as reduced training budgets and fewer business opportunities for various multinational firms, which have put a squeeze on the number of nights booked and rates paid at Singapore's hotels.

OCBC expects revenue per available room will continue to decline next year with supply continuing to outpace demand on the back of the ongoing weak corporate environment despite more visitor arrivals.

Barring a recession, a reversal is only expected in 2018 when demand and supply start to balance.

OCBC is sticking with its "neutral" rating on the hospitality sector in anticipation of single-digit declines in revenue per available room next year.

But it also noted that price levels look "very attractive" for some of the Reits, such as Ascott Residence Trust, CDL Hospitality Trusts and OUE Hospitality Trust.

OCBC has a "hold" rating on Far East Hospitality Trust and Global Premium Hotels.

Broadly, the leveraged Reit sector as a whole has suffered from the spike in interest rates after Mr Donald Trump won the United States presidential election and gave the markets renewed certainty that the US Federal Reserve will hike rates in December.

Deutsche Bank Markets Research said in a note last Wednesday: "Singapore Reits have retreated by over 4 per cent post-election and close to 10 per cent over the last month as a result of the steepening yield curve.

"While some of the Reits are trading at a 52-week low, we remain very selective, given the challenging fundamental outlook."

As borrowing costs are set to increase, sound capital management will become crucial, it added.

A version of this article appeared in the print edition of The Straits Times on November 22, 2016, with the headline 'Hospitality stocks expected to end year on gloomy note'. Print Edition | Subscribe