Youths are on the move, according to The Youth Travel Accommodation Industry Survey by industry body Stay Wyse. It found that the global youth tourism market has grown at a steady rate since 2005, when there was an estimated worldwide market of around 160m international youth tourism trips.
By 2011, this figure had grown to around 196m, up 3% on 2010, accounting for roughly 20% of global tourism. With travel becoming less expensive, especially for short-haul flights, international youth tourism is forecast to increase by approximately 100m trips by 2020, according to the United Nations World Tourism Organization.
In addition to the youth travel market, hostel operators are also increasingly targeting 25- to 34-year-old travellers. Those who fall into this category are well-educated, adventurous and upwardly mobile. The “flashpackers” among them are technologically sophisticated, mindful of fashion and design, socially aware and environmentally conscious. As the label would suggest, they tend to have more disposable income and therefore a larger budget to spend on hostel accommodation.
With travel becoming easier, guest expectations have grown, placing considerable pressure on hostel operators. Many now boast upgraded facilities, such as personal power sockets and individual lockers, as something of a standard. However, a minority of operators are pushing conventional boundaries to a more interesting extreme.
In much the same way as Schrager and Starck revolutionised the hotel sector in the late 1980s, brands such as Generator Hostels (see box, right) and Equity Point Youth Hostels are redefining the consensus. Their hostels are typically characterised by a shared emphasis on social interaction, design, contemporary aesthetics, modern facilities and a strong brand identity. To such an extent, some commentators have taken to using labels such as “five-star”, “designer” or “boutique” when referring to what is a budget-oriented product. However, it is not just the larger hostel chains that are moving in this direction, but up-and-coming brands such as PLUS and ONE80° Hostels.
Supply and demand
In determining the supply and demand of hostels in key European cities, research by CBRE Hotels focused on a mix of established and potential growth markets, including London, Paris, Berlin, Hamburg, Copenhagen, Dublin and Amsterdam.
At first glance, London appeared to be the most developed hostel market in the sample, with approximately 136 hostels, compared with 111 in Berlin and 56 in Amsterdam. Most hostels in London (around 57%) were located within Zone One, typically around Bayswater and Paddington, with a further 22% located in Zone Two.
There are still a high number of independently operated hostels, with fewer than half belonging to a branded hostel chain. With approximately 15 players in the market, this included traditional brands such as YHA as well as, to a lesser extent, modern operators such as Clink and Palmers Lodge.
Although London had the highest number of hostels in the CBRE sample, owing to the lower number of beds per property, it shared top spot with Berlin with around 17,600 beds. This is particularly interesting considering that Berlin is not a top-10 destination city in Europe. London, on the other hand, is the most popular city for overseas travellers, with 16.9m visitors as at Q2 2012 (MasterCard Global Destination Cities Index). CBRE Hotels’ research suggested that, of the two cities, Berlin was the more established hostel market. It also hinted at the potential opportunity for future growth in London and further brand consolidation.
Similarly, Paris proved an insightful case study. In much the same way that London is a popular tourist destination, Paris is a magnet for travellers, with 16m overseas visitors as at Q2 2012. However, by comparison with London and Berlin, it had a much smaller hostel market, with approximately 40 hostels (5,700 beds). This was behind Amsterdam (6,600 beds) and Dublin (6,000 beds), and slightly ahead of Copenhagen and Hamburg. Not only was Paris undersupplied in terms of the number of hostel beds relative to the size of its tourism market, there were relatively few branded operators in the city. With the exception of St Christopher’s Inn Paris, fewer still could be classified as “flashpacker” friendly.
Conclusion
According to CBRE Hotels’ research, the hostel market in Europe presents an interesting opportunity for real estate investors and one that is well worth exploring. Considering the growth in international youth tourism, there is a notable lack of hostel accommodation in key European cities. Furthermore, there are relatively few quality branded hostel chains, not least that have a pan-European presence.
In light of changing consumer trends, those that venture into this market and best understand the interplay between supply and demand should be well placed to reap the rewards.
Patron Capital and Generator Hostels
The growth of Patron Capital illustrates how hostels are now big business, writes Noella Pio Kivlehan. The firm has backed Generator Hostels since 2007 and was the first institutional private equity fund to enter the hostel market. Inspired by the boutique hotel model, with Generator it created the first design- and social-led hostel business.
Josh Wyatt, partner in hospitality and leisure at Patron Capital, believes the market can only keep growing. “Hostel space, on a pan-European basis, has immense room for growth. There is an abundance of real estate assets that are underutilised and thus are perfect conversion stories for a hostel business. Unlike new-build hotel developments, hostel conversion projects often bring a more rapid cash flow yield to the investor.”
But Wyatt does give a caveat to the statement about growth: “It is important to note that there will be winners and losers in the hostel space as the asset category expands. Just like any growth industry, there will be a rush to market with various concepts and teams.”
And, while hostels may be taking on hotels, Wyatt does see a time when hotel chains will enter the hostels market.
“It will take another few years before the larger hotel companies see the opportunity,” he says. “But if a large, publicly traded hotel company enters the space via an acquisition, this would supercharge the hostel market. Given that growth in Europe and the US is slowing for many large hotel companies, the hostel space represents one of the last bastions of potential massive growth.”
Journeys Hostels
While the hostel market is revolutionising and modernising, a new, and as yet small company, is trying to go back to basics, writes Noella Pio Kivlehan. Journeys Hostels, headed by 23-year-old Sean Fox, formerly a Starbucks barista, is a small chain of no-nonsense, cheap accommodation that promises “hostels bursting with fun, personality and the sense of community that true backpacking is all about”.
The company, which has so far funded itself, already has sites in London (Greenwich, King’s Cross, and London Bridge), Brighton, Dover and Thai island Koh Samui (Bank Rak beach).
But Fox has lofty ambitions: “We want hundreds of Journeys in cities, university towns and historic towns across Europe.” To achieve this, the company is prepared to lease pubs, churches, offices, cinemas, even an old ship, and any distressed assets for them to be run mainly as franchises.
Fox says the strength of Journeys is “its youth and vision”, which gives it a different take on the market. “Companies are trying to gentrify the hostel market. They are trying to make it the next budget accommodation market. There is a difference between pulling market share down to your product or being real budget. And we want to be real budget. How about 99p beds if you buy £20 of booze?”
Fox adds: “The finance people of this world like Patron want to back big super-hostels. But our model is ideally focused on acquiring smaller, cheap leases and freeholds. We want to lease from landlords who build to our spec, and we want to partner with investors who can see the benefit of our unique model.”
