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Hostels – the new asset class

Hostels – the new asset class – Translation of an article that appeared in Slovenia’s daily financial newspaper, on Tuesday 18th April 2017

By Jacqueline Stuart

The atmospheric Celica was the first hostel in Ljubljana, opened back in 2003, converted from a prison into individually decorated cells, rooms and dorms. Now hardly a month goes by without some new establishment appearing in the city centre. hostelworld.com lists 35 hostels in the city. These properties range from 19 to 132 beds, providing a variety of extra facilities such as WIFI, food and beverage facilities, bike hire, and laundry. Surprisingly few offer breakfast.

The first hostel in Europe was opened in 1912 in Germany, which now has the greatest concentration of such properties in the region. The England and Wales, and Scottish Youth Hostel Associations were founded 85 years ago, as charitable organisations, aiming to create opportunities for young people of limited means. They now have 210 establishments in rural, coastal and urban locations, offering everything from glamping in pods, shepherd huts, camping barns and dorms in historical buildings.

Today’s hostels

Most hostels provide flexible room types including separate rooms for male and female travellers, dorms that can accommodate up to six beds, private rooms for up to three travellers, single rooms, en-suite rooms with private bathroom and twin and double rooms. Some hostels offer kitchens, many have common spaces to hang out and socialise with fellow travellers, some even offer pools. Beds in shared dorms are inexpensive, ranging from 10€/bed/night, more commonly available at around 20€.

Hostel evolution

The hostel business has evolved and is now considered an established, albeit alternative asset class, attracting private equity and investment from global hospitality companies.

There are three main drivers that have fueled demand for hostels, and changed their profile from places for backpackers with basic dorms in out of the way locations, to hangouts for hipsters in the world’s most important capitals.

The first is the growth of budget airlines. According to Mintel, low cost carriers accounted for 40% of the scheduled seats on intra-Europe routes in summer 2016, up from 38% in 2015. They predict low cost carrier capacity will grow 13% year on year. Budget travel has exploded, providing unprecedented opportunities for anyone to explore the world, regardless of their budget.

The second is the development of the sharing economy, embraced by millennials all over the world. With their associated rejection of ownership – they share houses, cars, food, bikes, even clothes –  why not hotel accommodation? Younger business travellers are increasingly using hostels. Companies including Johnnie Walker, Nike, Red Bull, Uber, Facebook, Google and MTV have hosted away days and product launches at Generator hostels in the UK. Airbnb is also benefiting from this shift, the home sharing giant is seeing 14,000 companies a week sign up for its business travel services and is already being used by corporates such as Morgan Stanley.

The third is the change in profile of hostels themselves, they have morphed from basic pit stops into hospitality establishments that deliver more than just accommodation, they promise an experience. Miami hostel Freehand has a bar called the Broken Shaker that has ranked among the world’s best since 2014. It has been referred to as the ‘best American hotel bar’, a remarkable achievement for an inexpensive hostel.

Hostels in Slovenia and Croatia are aware of what they need to do to succeed. workaway.info  is full of hostel opportunities for volunteers to spend the summer touring guests round bars and other attractions, in return for bed and board.

There are six key elements to creating a successful hostel.

A central location within a major tourist destination is paramount
Food and beverage facilities in house, or nearby are important
Proximity to nightlife and entertainment such as bars and clubs
Hotel like amenities for guest convenience are increasingly important
Security safes for valuables and charging lockers for mobile devices
Cleanliness – very important considering shared bathrooms

The hostel business in Slovenia is still the domain of entrepreneurs, the country is yet to see chains develop. It is more developed in the UK and Germany, with successful chains also present in Austria, Italy and Spain.

Why develop a hostel?

There are compelling reasons to build, or redevelop existing properties into hostels. The development cost per room is much lower than for hotels, given that en-suite bathrooms are not necessary for all rooms. Parking is not necessary, guests arrive using public transport.

Hostel performance metrics for occupancy and average rate are expressed per bed, not per room. Analysis typically focusses on Revenue per available bed, rather than the standard revenue per available room, used for hotels. According to hotels expert HVS, the average room rate for a hostel is typically higher than the average room rate for a hotel, as it is beds that are sold, not rooms. This results in a greater revenue stream for hostel assets versus hotel assets, which is a key factor in their development and popularity with developers and investors.

Marketing a hostel is straightforward, online travel agencies provide most bookings – so no expensive marketing department required. Fixed costs in the form of employees are low – no army of people is necessary, just someone to provide a friendly welcome and to keep the place clean.

The future for hostels

Since the mid 1990s, branded hostels have been successfully developed in London, Paris, Barcelona, Berlin, Amsterdam, Rome, Prague and Venice. Development of such properties has grown exponentially over the last two decades, with future growth expected to come at an even faster pace. The hostel market is considered to be underserved in virtually every European country.

Hybrid hostels

An interesting growth area is hybrid hostels, combining the best of hostels and hotels.

Europe’s largest hotel group, Accor, launched its first Jo&Joe property in the French surf paradise of Hossegor, in September last year. The 145-bed property is the product of a collaboration between AccorHotels and sports brands Quiksilver and Roxy. Accor claims to blend the best components of hotels, hostels and private rental platforms in Jo&Joe properties. With plans to expand rapidly, the brand will open hostels in Paris and Bordeaux next year, as well as Warsaw, Budapest, Rio and Sao Paulo. They aim to have a presence in around 50 destinations by 2020.