Are investors undervaluing hotels?

The 29-room Wanderlust Hotel was sold at a whopping $1.3m per key, following construction costs estimates for other hotel sites.

The 29-room Wanderlust Hotel was sold by a company linked to Loh Lik Peng, the founder of hotel and restaurant group Unlisted Collection to 8M Real Estate for $37m. This translates into around $1.3m per key, DBS Equity Research said in a report.

Wanderlust Hotel is located along Dickson Road, in the Little Conservation Area and is near the Jalan Besar MRT Station.

DBS Equity Research analyst Mervin Song noted that this transaction follows news that the cost of developing a 340- to 350-room hotel on the ex-Singtel site at Hill Street will be approximately $1.1m and market speculation was that buyers were willing to pay $1.3m per key for the Park Hotel Farrer Park.

“In our view, this news again highlights the disparity in valuations that physical market and equity market investors ascribe to hotels in Singapore,” he said. “Currently, the implied value of the Singapore hotels for hospitality REITs ranges from $625,000-$1,000,000 per key.”

“With hospitality S-REITs trading effectively below replacement cost and the hospitality market expected to be on a multi-year recovery given limited new supply over the next three years, we retain our Overweight stance on the sector,” the analyst added.