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The hostel market and its growing investor appeal

Following the announcement of Queensgate Investments' acquisition of Generator Hostels, Anna Friedrich, Senior Consultant in our Hotel Consultancy team explores the future of the sector and why it's increasingly being put on the investor map.

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The recent sale of Generator Hostels to Queensgate Investments in a €450m deal is the latest example of the increasing attractiveness of the hostel sector to investors. Camil Yazbeck, Partner and Investment Director at Patron Capital, commented: “The Generator Hostels portfolio has transformed the hostel sector and shown tremendous growth potential”. Attracted by the fact that Europe’s top ten destinations attract almost 20 million international youth travellers, TPG Real Estate purchased A&O Hotels and Hostels, the largest, privately-owned, hostel platform in Europe, earlier in 2017. Meininger, another key player in the sector also demonstrates this growth story, having significantly accelerated its development pipeline with 15 signed contracts which will more than double the group’s bed count across Europe, since its acquisition by Cox & Kings in 2013. Thus, three of the top five hostel brands in Europe have been acquired in the last four years.

As the hostel sector is gaining momentum we see significant potential for investors to take advantage of this growing market. Considering the significant evolution of hostels from accommodation facilities that provide inexpensive lodging and food, 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 travellers on a budget, new hostel concepts with upgraded facilities appeal to more mature and affluent guests. 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 is also 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.

Having advised in the recent due diligence process of Generator Hostels, as well as conducted several valuations of independent and branded hostels, Christie & Co considers the outlook for the hostel market to be positive as increasing demand, along with the establishment of new brands and properties, results in improved performance.  As the image of low rates is slowly changing, investors are increasingly attracted by hostels because the high bed-to-room occupancy rates and low margins generate good profits – especially the hybrid hostels such as Meininger and Generator which have expanded substantially in recent years. Initiated by recent acquisitions and the growing interest from hotel operators, Carine Bonnejean, Head of Consultancy – Hotels at Christie & Co also expects increased appetite as investors become more knowledgeable about the fundamentals, growth potential and strong performance metrics of the sector. Especially some of the smaller hostel chains that have been overlooked so far could be offered for sale in the future, providing excellent platforms to consolidate the sector further.

If you would like to learn more about the hostel sector in Europe please do not hesitate to contact us. Our 20-strong Pan-European hotel consulting team would be more than happy to assist you.

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