London-based private equity real estate fund manager Queensgate Investments has announced plans to buy hostel owner and operator Generator Hostels for €450 million.
Generator, which operates a total of 8,639 beds in London, Paris, Copenhagen among others, was previously owned by Patron Capital and co-investment partner Invesco Real Estate. The operator currently has a portfolio of 12 predominantly freehold assets, and two properties are under development. Its revenues are above €70 million.
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Queensgate reportedly plans to invest around €300 million into adding more hostel assets.
Hostel Appeal
The sale is further evidence of the growing appeal of hostels as an investment option. “The Generator Hostels portfolio has transformed the hostel sector and shown tremendous growth potential,” Camil Yazbeck, partner and investment director at Patron Capital, said.
Earlier this year, TPG Real Estate purchased A&O Hotels and Hostels, the largest privately owned hostel platform in Europe. Meininger, another key player in the sector, has similarly accelerated its development pipeline with 15 signed contracts that will more than double the group’s bed count across Europe since its acquisition by Cox & Kings in 2013.
In other words—three of the top five hostel brands in Europe have been acquired in the last four years. Anna Eck, senior consultant at Christie & Co., credits this to the fact that Europe’s top ten destinations attract almost 20 million international youth travelers.
“As the hostel sector is gaining momentum, we see significant potential for investors to take advantage of this growing market,“ Eck said in a statement, noting the “significant evolution“ of hostels from bare-bones facilities to establishments that combine traditional hostel features with hotel-like facilities such as private bedrooms, en-suite bathrooms and extensive F&B outlets.
“While initially only targeting young travelers on a budget, new hostel concepts with upgraded facilities appeal to more mature and affluent guests,“ Eck said. “Attracted by the high spending power of millenials, AccorHotels launched Jo&Joe in 2016, a hostel concept blending in private rental and hotel formats.”
This, she said, could also be seen as an attempt to consolidate a highly fragmented market. “When compared to the hotel industry, the hostel sector still has a very low brand penetration. Existing hostel chains compete primarily against independently-owned hostels or small groups in individual cities.
“Aside from the opportunity that the fragmented nature of the sector offers, the hostel business model presents an attractive growth and yield proposition, with good margins through significant volume and generally low costs. Together with its fragmented nature, the sector offers tremendous potential for investors. Traditionally, dorms were the main driver of hostel revenue due to the volume-driven nature of the business. Given the traditional price-sensitive guest segment, food and beverage was offered at low prices, significantly reducing the margins while ancillary spend played a more important role i.e. though towel and locker rental or paid-for events such as pub crawls or city tours. As the millennial traveller is willing to spend more to get an authentic experience, the hostel’s business model success driver is the ability to drive volume and ancillary spend whilst keeping costs low.”
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In last year's first-ever Hostel Trend Report, Phocuswright and Hostelworld found that the hostel industry is projected to grow by 7 to 8 percent year-over-year, and as of the time of the report's release, the industry was valued at $5.2 billion in bed revenue.
The highest hostel revenue growth areas are in markets that appeal to millennial travelers, including South and Southeast Asia (13 percent), followed by the Middle East (11 percent), Eastern Europe (11 percent) and Northern Asia with China in the lead (10 percent).