Safestay rides hostel trend

Foreign investment was significantly high in H1 2017, racking up over $67 million in Scottish hotel acquisitions.
Safestay Hostel Edinburgh, Scotland exterior

Safestay said that it had almost doubled its hostel network last year and was well placed to grow “substantially” in 2020.

The company has seen rising appetite for hostels, at a time when investors have been building platforms in the segment.

During the year Safestay undertook six transactions, adding eight hostels, increasing the portfolio to 21 sites and over 5,100 beds. The deals meant that Europe went from 43% of sales to 49%.

Last month the company agreed a new five-year £23m loan facility with HSBC, replacing the £18m  five-year loan facility agreed in 2017 providing, Safestay said “additional headroom to support commercial objectives”.

At the end of last year the company bought hostels in Bratislava and Warsaw from Dreamgroup, with the completion of the acquisition of the third hostel of the Dream portfolio, located in Prague, due to take place in the next weeks.

Safestay said that for the year to end-December it had seen a 25% growth in total revenues to £18.3m with like-for-like revenues up 7%. The company reported an 11% increase in adjusted Ebitda, with 77.3% occupancy achieved over the period, up from 75.6%.

F&B was up 43% in 2019 and supported by the refurbishment of three restaurants in Barcelona, Elephant & Castle and Edinburgh. These enhancements were part of a £1.8m refurbishment and renovations programme across 2019 and 2020.

Larry Lipman, chairman, Safestay, said: “In 2019 we near doubled the size of the Safestay network. In doing so, the Safestay brand has become Europe’s leading premium hostel network totalling 21 sites, all in sought-after central locations in the UK and Europe’s best known cities. The brand is now well established and positioned to sell over a million bed nights in 2020 in unique hostels ranging from Edinburgh to Athens.

“Trading in 2019 was good, all key indicators were strongly positive, in particular the organic growth performance, and critically we have yet to really benefit from the recent acquisitions agreed towards the end of the year. Safestay is therefore well placed to grow substantially in 2020 and take advantage of the increasing popularity of the modern hostel sector.”

The company said that, while still very early in the year, performance in the first month of 2020 and forward bookings for first quarter were very encouraging, “a positive signal for the coming year”.

Last year saw BlackRock Real Assets acquire a pan-European hostel portfolio as part of a €100m joint venture with Amistat International, with plans to acquire hostels across the region.
The deal comprised a seed portfolio of three assets, with an active pipeline of another six.

Thomas Mueller, European head of value-added real estate, BlackRocksaid: “This transaction presents an opportunity to gain early-mover access into an increasingly institutional but undersupplied asset class. The demand profile for hostels is particularly appealing given the lack of quality, modern stock in the market, which is characterised by fragmented ownership and very low brand penetration.”

The pair said that, while the presence of institutional capital in the hostel market had historically been limited due largely to the disjointed market and difficulty in accessing stock and achieving scale, interest was growing from institutional investors who had invested or expanded in recent years and for whom the acquisition of a portfolio of operational assets should be attractive.

Phoenix Chow, associate, hotels, Savills, described hostels as providing: “lean and efficient business models, presenting investors with an attractive growth and yield proposition. They are a volume-driven business coupled with low operational costs reflective of a price sensitive guest segment.

“Supply, relative to potential demand, remains constrained across most European gateway cities pointing to expansion opportunities, such as in the UK where hostels account for just 1.41% of room supply and 0.23% of the active pipeline. Smaller hostel chains across Europe offer excellent platforms for investors to enter and further consolidate the market.

“We predict that this immature sector will continue to grow from strength to strength, presenting opportunistic and forward thinking investors with an excellent opportunity to capture capital and secure income growth across a global hostel platform as the younger demographic continue to push the boundaries of travel, hostel operators are in a good place to respond.”


Insight: It’s fair to say that when Safestay goes looking for an exit, it won’t be too hard to find a series of willing buyers and many of them will come from the kind of organisations which, you would think, don’t have much of an interest in hostels. Certainly they wouldn’t be leaping to undertake any research trips.

Or would they? Prior to the sale of Generator to Queensgate Investments this hack undertook some site research and found the property infested with travelling businessfolk, enjoying the meeting rooms, private bedrooms and, critically, the lively shared space, which rained all over most hotel bars one could hope to mention and came with free high-speed wifi. Oh, and the property was centrally located. They seemed to be working their way past the lack of trouser press with some aplomb.

For too long, travellers have been told what they’re getting from their hotels and, particularly in the business market, this has been long on trouser presses and short on soul. Hostels were not an obvious place to find the corporate market, but Generator attracted enough to see fit to add meeting rooms, even if they weren’t all staying overnight.

And once they’ve stayed, they invested. The costs are competitive in terms of operations but also development. The sector is still disparate - think budget hotels 15 years ago - and the travelling public continues to grow. It’s not longer soggy stocks steaming at the end of a three-tier bunk bed, although no-one’s pushing to get rid of happy hour. Some things are sacred