SINGAPORE (Aug 29): OCBC Investment Research is keeping its “neutral” rating on the hospitality sector with expectations that the industry’s supply overhang situation will worsen this year.

Nonetheless, the research house says there are still undervalued stocks within the hospitality space. It remains positive on Ascott Residence Trust (ART) and CDL Hospitality Trust (CDLHT) with fair values of $1.24 and $1.53 respectively. Both REITs have been rated “buy”.

(See Longer-term uncertainties from Brexit loom over Ascott REIT)

(See CDL Hospitality Trusts' 2Q DPS 0.9% lower at 2.23 cents on soft trading conditions)

“Given the weak revenue per available room (RevPAR) performance across the board, especially in the context of a comparison between an MICE-filled even-numbered year over an odd-numbered one, we remain pessimistic about the operating performance of hospitality assets for the second half of this year,” cautions lead analyst Deborah Ong in a Monday report.

Although OUE Hospitality Trust’s results were among the most resilient in 1Q16, Ong points out that Mandarin Orchard, its five-star hotel property, posted an 8.3% drop in RevPAR this quarter.

One key reason for the industry’s overall underperformance is its overhang of supply from 2015.

Ong shares that total room stock has outstripped the “modest” 0.9% increase in tourist arrivals by rising 6.5% in 2015, which she believes contributed to last year’s decline in average occupancy rates (AOR), average room rates (ARR), and RevPAR.

“Going forward, we believe the room supply injection will not be adequately matched by a growth in demand,” she states. “The room supply is expected to increase another 4.7% to 63,800 rooms this year.”

Furthermore, Ong notes that the outlook for corporate demand remains weak, despite a “healthy start” for visitor days, which were up 4.5% from January to June this year. This is especially so for corporates in the oil and gas (O&G) and financial sectors.

“We note that key global uncertainties such as the pace of rate hikes, the implications of Brexit, the US presidential elections, and the debt situation in China will be important issues affecting MNCs in the next six to twelve months,” says the analyst.  

Units of ART closed 0.87% lower at $1.14, while CDLHT units closed 0.71% lower at $1.41.