Leading hostel brands are looking to restart their businesses, as the pandemic wanes. But it seems they may be welcoming new investors, as well as returning backpackers.
The niche was hit harder than hotels, as lockdowns hit. Even during times when they were able to operate, social distancing regulations meant hostels could not use multi-bed shared rooms at anywhere near capacity, further exacerbating cashflow issues.
Queensgate Investments, which includes Generator hostels in its portfolio, announced a EUR600m refinancing in March. Existing debt with lenders HSBC, Société Générale and Aareal Bank was refinanced, with a further EUR100m provided from Apollo Global Management. With the refinancing complete, Queensgate CEO Jason Gow commented: “With the Millennial and generation Z customer base, we are confident of a rapid and resilient recovery once travel restrictions are lifted.”
Generator has 19 properties, of which it owns 17 freehold; in 2019, Queensgate also acquired US hostel group Freehand, adding its four US properties into the brand.
UK listed Safestay has sold its Edinburgh hostel to Germany-based operator a&o. The GBP16m deal represented a 22% premium to book value for Safestay, which has been battling fixed costs on its portfolio, through periods of covid lockdown. In a statement, the group said: “The board believes this sale was the best option to protect shareholders’ interests and place the company in a strong position for when the market recovers, being able to take advantage of new opportunities that are expected to arise.”
Chairman Larry Lipman said that the sale was a necessary step to support the business: “We reduced our debt by 35%, and we’ve got some cash in the bank.” He said occupancy is starting to improve, but remains up and down across its portfolio, depending on local market uncertainty. However, Safestay will look to grow again: “We’ve got our eyes very wide open.” However, he believes it will be a few months before opportunities appear.
For a&o, private equity owner TPG has continued to provide support, as the group looks to further growth. It opened in Budapest last autumn, has the Edinburgh site as its first toehold in the UK market, and has further sites in Copenhagen, Florence and Heidelberg in the pipeline.
Speaking at the opening of the Edinburgh site, CEO and founder Oliver Winter said: “In this, our 21st year of operations, we now have properties in 24 cities and nine European countries and have ambitious expansion plans and are looking at multiple locations across the UK and Ireland.”
Hybrid brand Meininger currently has 30 sites across Europe, and is opening five new properties in 2021, having already launched Zurich, Bordeaux and Geneva. “Our industry is experiencing tough times and facing many challenges caused by the pandemic and its consequences. However, we have been able to shift priorities, drive digitalization and growth, including the five new openings for 2021,” said CCO Doros Theodorou.
And in a sign that major hotel groups are paying greater attention to the hostel niche, Louvre Hotels has quietly launched a new hostel brand, Hosho. The first site, south of central Paris in Kremlin-Bicêtre, is offering beds in shared rooms from EUR20 per night. The site, a converted office building, has 236 beds in 39 rooms. According to a report in Les Echos, the brand expects to draw in families, travelling groups and professionals, not just backpackers.
According to reports in the Spanish media, several major hotel groups are now angling to introduce an offering in the hostel space, across the country. Vozpopuli reports that Accor is looking to expand its Jo&Joe brand, which includes a mix of private and group shared rooms, and has Madrid in its sights. Louvre is already scoping out Madrid for its Hosho brand.
Carlos Miró, director of expansion for Spain and Portugal at Hilton, said the group was keen on cities such as Madrid, Barcelona, Malaga or Seville as it rolls out its Motto brand – which has hostel-like elements such as connecting rooms. Motto was originally slated to launch in London, but lost the site; to date it is live in three US cities, with a pipeline of 14 locations including its first European property in Rotterdam, due to open next year.
Ivar Yuste of PHG Group, who maintains a database of hostel operators, said the model – now refined for a broader audience – particularly lends itself to office conversions. “Buildings in city centers are complicated, old and irregular, but with this flexible concept you have many possibilities. More and more are adopting the mixed concept where they mix conventional hotel rooms with hostel rooms with bunk beds.”
Yuste says the sector is ripe for expansion and for growing stronger brands: “It is the only non-professionalized hotel segment, the smallest in volume and the one that is most dispersed at the chain and owners level. Nobody has consolidated it at a national level, much less globally.”
HA Perspective [by Chris Bown]: Before the pandemic, every decent hotel group realised they needed an extended stay brand or two in their locker. With that box ticked, it looks as though a hostel-style brand is fast becoming the next desirable addition.
And why not? With a&o and Meininger hosting hundreds of school groups, here’s the opportunity to hook those consumers when they are young – and keep them in the brand portfolio through to the years when they’re high spending road warriors. Louvre is the latest to spot this logic….who’s next?
Private equity is doing quite nicely out of the hostel space right now, and having survived the pandemic, those with the deepest pockets will doubtless be looking for more growth. a&o is in a good position, Accor has skin in the game, and now Louvre is testing the water. Again, the hostel concept is diluting from its cliched backpacker demographic and joining the ever more blended world of hotel-like accommodation.
Additional comment [by Andrew Sangster]: Like other emerging accommodation sectors, the hostel market is far from being a clearly defined category. Most commercial operations offer facilities that can be loosely defined as hybrid, with dormitory-style accommodation offered in the same building as individual rooms.
Most operators are still feeling their way as to what works best: simultaneously chasing the family market, school / youth group market and the youth party market is not easy to pull off. As brands mature, there will be biases towards certain markets. But for now, most brands seem to be chasing all markets, styling themselves as both hostels and hotels.
The emphasis is providing an affordable and central location, with some brands like Generator particularly pushing the style and party element and others, like Meininger, keener on promoting the family-friendly nature of their offer.
For property owners, the key sell is around profitability per square metre. Dedicated hostel operators argue they deliver better than typical hotel brands. The push of hotel brand owners into the space, most notably Accor but also at the upper end of the market with Hilton’s Motto, enables a direct comparable.
Meininger might be an entry point for a hotel brand company wishing to grab a head start in the hostel market. But its leased portfolio makes a sale to private equity or a resurrection of its IPO more probable. The sale process underway at the end of 2019 was dumped in favour of a potential listing but this too met an untimely end at the start of the pandemic in March 2020.
A listing of Meininger would undoubtedly help the profile of the hostel sector, particularly as it is a significantly sized operator. It has plans to have 34,000 beds by 2024 including some in the USA. Hard data and transparency will help transform the appeal of hostels.