‘Dynamic’ hostels attract investors

Generator Hostels
Investors are drawn to the sector

Investors are attracted to the “dynamic” hostel sector, with opportunities to maximise profits, according to a study from Christie & Co.

The group reported that the adaptability of the segment would aid its longevity, as traditional hotel operators started to show an interest in hostels.

Joan Bagó, market analyst, Christie & Co, told us: “The hostel market is a such a new product and so opaque but there are some players in the market that stand out. Hostels come from what used to be youth hostels, with school groups, and now they are adapting to demand from Millennials and trying to extend that further, to families, to groups of friends. All of them have very different needs but the reason why we think hostels have a future is that they are very dynamic and able to adapt, while the hotel sector tends to be more fixed.”

The study said that, in terms of investment, the hostel market was still relatively young compared to hotels. The group said the most common formula used by investors was the creation of joint ventures with existing hostel operators, such as KKR/Excem Real Estate and Cats Hostels, BlackRock Real Assets and Amistat Hostels, A&O and TPG funds or Azora with its new hostel brand.

The company looked at the Iberian peninsula and said that transacted assets were located in the prime areas of cities such as Barcelona, Madrid, Lisbon, Malaga or Seville. Generally, they were large assets, with an average of 300 to 400 beds with an average price per bed ranging between €30,000 and €40,000.

The group said: “We note that the increasing interest towards hostels from investors has driven higher transaction prices in other European cities (above €80,000 per bed). We note that due to the high number of conversion projects within the hostel sector, investors find the price per square meter a more relevant metric to assess development opportunities, given the fact that they can also allocate more beds per square meter in comparison with the hotel development. In general terms, we have identified an approximate price per square meter of €4,000.”

In general, returns varied between 6% and 7%, above those a hotel could generate in a similar location (between 5% and 6%).

Bagó said: “Investors are interested in hostels as an opportunity because of the opportunity for profits on the asset. You have more beds and you have the chance to be creative, there is the capacity to maximise the space, that is why it has such a lot of potential.”

The study said that there were a lack of regulatory standards within the hostel sector, which was driving a need for specific regulations for hostels, as well as stricter controls on the minimum standards regarding spaces and services.

The company forecast that in the future, a similar categorisation to the hotel sector would be introduced for hostels, which will require a more specific legislation, different from the one in place, and which should benefit the entry of new operators.

It added that the biggest challenge facing the segment was whether demand for hostels was solid enough, or just a temporary trend. It said: “The current hostel demand has proven to be more volatile, less loyal to brands and rather focused on looking for experiences and specific concepts.

“Based on this, hostels should continuously reinvent themselves in order to avoid obsolescence and continue satisfying not only Millennials, but also future generations. As a result, further investment in this sector is required to ensure fast adaptation.”

Looking at the whether the large global operators needed to have a hostel brand in their portfolios, Bagó said:  “To hotel companies, hostels still look like a budget product. Many hotel companies now have apartment brands but a lot of hotel companies who might look at a hostel brand might find that they are too inconsistent. For one of those companies to have a hostel brand could be very interesting and we are seeing some local players with traditional hotels starting to launch hostel brands.”

Bagó used as an example the son of AC Hotels’ founder Antonio Catalan, who launched TOC Hostels, with four sites and two in the pipeline.

Insight: The study said that, looking ahead, investment would be needed to ensure that hostels remained appealing as guests got older and anyone who has stayed in a Generator will confirm that not only are the guests often above what one would think was average hosteller age, they are also often corporate travellers. It is a broadening church.

The adaptable nature of hostels means that they are often able to take prime locations where a hotel would not normally fit and, almost for that reason alone, the global operators should be looking to snag a new brand for their portfolios. Accor is making progress in the segment with Jo&Joe and one suspects that Marriott International’s involvement with AC Hotels means that it is also monitoring the situation.

The other reason that the global operators need a hostel in their pocket, other than those lovely maximised profits, is that they need more of the entry-level brands to bring lifetime guests into their loyalty programmes. Hilton recently launched Tempo by Hilton with just this in mind and it would seem savvy to catch guests even younger. While hostels are more adaptable than their hotel counterparts, some hostel goers will still graduate to a Raffles or a Ritz Carlton. Start ordering the bunk beds.