Hoteliers in for another challenging year: analysts

Subdued global business sentiment, strong S$, stiff competition cited

Angela Tan
Published Tue, Dec 24, 2013 · 10:00 PM
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ANDREW Cunning is used to being greeted by the whiffs of freshly cut imported flowers at the lobby of a five-star hotel whenever he visited Singapore. These days, however, he has to settle for less as his company has cut its global travel budgets.

Gone are the days when corporate travellers can look forward to business class travel. Hoteliers, too, are feeling the discomfort. Singapore's hoteliers, whether offering bland uniformity or authentic warmth, are in for another challenging year ahead next year as travel budgets stay tight and more rooms proliferate.

"Essentially, business travellers as a whole were forking out less for hotels, downgrading to mid-tier hotels. . .It is likely that they were downgrading from an upscale category," OCBC Investment Research analysts, Sarah Ong and Carey Wong, said.

Revenue per available room (RevPAR) is expected to stay weak, even though next year should see more meetings, incentives, conventions and exhibitions (MICE) events such as the Singapore Airshow, given that biennial events are generally held in even numbered years, according to the analysts, who are keeping their neutral rating on the Singapore hospitality sector.

"We project 2014 RevPAR growth for the industry to be in the low single-digit percentages at best, and do not rule out another year of contraction," they said.

Hotel bookings up to February next year are still soft, industry sources said.

"The dreariness that characterised the Singapore hospitality industry over 2013 looks set to continue into the first quarter of 2014 with the subdued global business sentiment, a strong Singapore dollar and increasing competition with an expanding supply of hotels," Ms Ong said.

This year has not been easy for Singapore hoteliers, with RevPAR for the first 10 months falling by 1.1 per cent to $223.70. While the decline does not look significant, the figures may have been skewed upwards by the continued strong performance of the integrated resorts (IR) hotels, which account for about 8 per cent of the total stock, the OCBC analysts said.

Marina Bay Sands, one of the two IRs in Singapore, experienced RevPAR growth of about 10 per cent for the first nine months this year. In contrast, CDL Hospitality Trusts' (CDLHT) Singapore hotels, which include Orchard Hotel and Grand Copthorne Waterfront, experienced a RevPAR decline of 7.7 per cent for the same period. Far East Hospitality Trust's (FEHT) Singapore hotels, which include Orchard Parade Hotel and Rendezvous Grand Hotel, have been missing their revenue forecasts indicated during its initial public offer.

Hoteliers in the city-state face the triple whammy of an increased hotel room supply, a strong Singapore dollar relative to most regional currencies and negative business sentiment, especially regionally, which is leading to smaller travel budgets.

Hotel room supply has grown at 5.8 per cent this year. Mid-tier hotels experienced the greatest increase in room supply at 15.8 per cent to 17,200 rooms, while the economy and upscale/luxury tiers saw growth of 1.9 per cent and 1.7 per cent to 7,100 and 29,300 rooms respectively.

Since end-2012, six of the currencies of the top seven regions accounting for Singapore's tourists have fallen against the Sing dollar. Most notably, the Indonesian rupiah, the Australian dollar and the Japanese yen have fallen 16 per cent, 11 per cent and 14 per cent respectively.

While Singapore recorded higher visitor arrivals of about 12.9 million for the first 10 months this year, these translated to fewer hotel room nights on a per capita basis. In the first quarter alone, business travellers/

MICE arrivals fell 6 per cent and their spending declined across all components, particularly in accommodation which was due to a downgrade to mid-tier hotels.

The worst performing hotel tier was that of upscale, which includes hotels in the prime districts or with boutique positioning in distinctive locations. These upscale hotels saw their RevPAR drop 12.4 per cent to $232.50 on a 10.6 per cent decrease in average room rate to $269.50.

The mid-tier segment, which saw a large increase in hotel room supply between end-2012 and October this year, registered only a 3.2 per cent decline in RevPAR to $165.50. The economy tier, which comprises hotels in outlying areas, saw RevPAR fall 8.1 per cent for the first 10 months of 2013 to $85.80 despite only a marginal increase in hotel room supply.

No relief appears in sight for hoteliers as hotel room supply is projected to outstrip demand growth over the next few years.

"For 2013, the growth in hotel room supply is expected to be 5.8 per cent. For 2014, growth is expected to be even higher at 7.1 per cent," said Ms Ong. Meanwhile, demand is expected to be slightly lower at 6.4 per cent.

For investors keen on the hospitality sector, OCBC has a "buy" call on Global Premium Hotels, which owns mostly economy-tier hotels under the Fragrance brand. Fair value has been pegged at 33 cents a share. The shares were last trading around 25 cents each.

"The opening of the second Parc Sovereign hotel should lead to a significant earnings boost and act as a catalyst for the stock," OCBC said.

As for the IR hotels such as Genting Singapore, they are a class unto themselves, with the casinos being an in-house driver for demand, the analysts said.

Genting Singapore has been the best performer in OCBC's hospitality coverage, churning absolute returns of 5 per cent since end of last year.

Concerns over quantitative easing by the US Federal Reserve have hit real estate investment trusts as a whole including Ascott Residence Trust, Far East Hospitality Trust and CDL Hospitality Trusts.

"The Singapore hotels of both CDLHT and FEHT were affected by the lacklustre performance of the hospitality sector in 2013, and CDLHT's was affected more because of its higher-end positioning than FEHT, with business travellers trading down to cheaper hotels," OCBC said.

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