Cost-cutting woes: Local hotel earnings plunge as corporate spending slides in 1H

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Local hotels are bearing the brunt as firms continued to tighten purse strings in 1H. As hospitality REITs are heavily reliant on corporate visitors, hotel earnings took a hit in the past quarter on the back of lower visitor arrivals and lower travel and spending by corporates.

According to a report by CIMB, restraints on travel spending by firms was the main reason cited by hospitality REITS to explain their lacklustre Q2 results. Corporate spending makes up 25-60% of hotels’ revenues.

Hotels were also indirectly impacted by the Chinese visitor slowdown. Hospitality REITs were also impacted by pressure on hotel room rates and occupancy as the market continues to digest last year’s supply.

In the first half of the year, revenue per available room plunged most for the mid-tier segment, which saw a drop of 12.9%. The next worst was the upscale hotel segment, which reported a dip in RevPAR of 4.2%.

“In terms of reliance on corporate spending, among the S-REITs, CDL-Hospitality Trusts (CDLH-HT) and Far East Hospitality Trust (FEHT) have the highest reliance on corporate spending at c.58-50% of the REITs’ revenue compared to c.28% for OUE-HT. Given that corporate travellers tend to pay higher room rates than tourists, we expect corporate reliance to continue to be significant to hospitality REITs’ earnings,” CIMB stated.

But the report also noted that a better 2H looms for hospiality REITs, as managers expect stronger corporate bookings n the back of more events and seasonality.

“We expect hotel RevPAR to gain ground in 2H14 on the back of i) lower supply of new hotel rooms than previously forecast, ii) the recent opening of the Singapore Sports Hub,and iii) stabilisation of the rupiah. We think hotel REITs are becoming attractive as fundamentals strengthen,” noted CIMB.