Massive hotel room glut to squeeze hospitality REITs’ profits in 2015

Luxury hotels are particularly vulnerable.

Slowing tourism arrivals and a increasing number of hotel room completions will squeeze hospitality REIT’s profits in next year.

According to Moodys, the hospitality sector faces headwinds from slowing tourism and increased competition, particularly in the upscale and mid-tier segments.

Moodys predicts that the aggregate earnings of Far East Hospitality Trust and OUE Hospitality REIT, its two rated hospitality REITs, will grow by less than 2% over the next 12-18 months.

“Far East Hospitality Trust and OUE Hospitality Real Estate Investment Trust, which are focused on the upscale and mid-tier segments, will see the largest squeeze on revenues. Of the two, OUE Hospitality Real Estate Investment Trust will be more resilient because 30% of its revenues come from the leasing of retail space at Mandarin Gallery, a shopping mall located in its hotel on Orchard Road, while Far East Hospitality Trust derives only 20% of its rental revenues from the leasing of commercial space within its hotels and serviced residences,” noted Moodys.

Here’s more from the report:

According to the Singapore Tourism Board, international tourist arrivals fell by 3% in the first half of the year from the year-earlier period. The fewer tourist arrivals was due to continued impact from China’s tourism law, which was enacted in October 2013. 

In addition, the disappearance of flight MH370, abduction of Chinese visitors in Sabah and political unrest in Thailand have all had a dampening effect on Chinese tourists to the region.

Despite the slowing tourist arrivals, the supply of hotel rooms has continued to grow at a compounded annual growth rate of 4% from 2013-2015, according to research published by Horwath HTL and CDL Hospitality Trust.

The study estimates a total of 3,676 hotel rooms will complete between 4Q 2014 and 2015, the bulk of which is in the upscale and mid-tier segments.