Why Should Investors Consider Hostels over Hotels?

The hostel industry presents a compelling investment opportunity, outshining hotels in several aspects. Recent research indicates that the global hostels market is projected to reach $7.65 billion by 2027. So, what makes hostels an attractive choice for investors? Let’s delve into the challenges, risks, and potential gains associated with this sector.

According to Luke Knowles, the Strategy and Development Director at a prominent hostel group, hostels have proven to be a lucrative business, particularly in the post-Covid era. Furthermore, they represent an underdeveloped and under-bedded segment, especially in western Europe. Despite the substantial demand from the largest segment of travelers—Gen Z and Millennials—only a handful of large hostel chains currently exist, accounting for just 10% of the total bed stock in Europe.

Many hostels are still run by smaller, individual owners who may not be fully optimizing their available space. This creates a significant opportunity for consolidation and market growth. By capitalizing on this potential, investors can make a substantial impact in the industry.

Key Insights into the Hostel Market

Beds & Bars Group, a prominent player in the industry, operates over 20 hostels across the UK and Western Europe, boasting approximately 4,500 beds and generating a turnover of around £65 million. The company separates its accommodation and food and beverage (F&B) brands, with venues like Belushi’s late-night party and sports bars located adjacent to or beneath its St Christopher’s Inn accommodations.

During peak seasons, independent travelers contribute about 70% of the hostel’s customer base, with the remaining 30% consisting of group bookings. In slower periods, the business strategically relies on group bookings to boost occupancy, even if it means slightly reducing prices to fill beds and secure revenue through alternative avenues, particularly F&B. Approximately 40% of the revenue is derived directly.

Knowles emphasizes the resilience of hostels in the face of socio-economic downturns due to their lower price point. St Christopher’s properties, for instance, quickly rebounded to occupancy levels exceeding 90% after reopening post-pandemic.

Regarding the composition of hostels, Beds & Bars primarily focuses on conversion opportunities. The bed mix in a building typically consists of around 15% private rooms, 10% capsules, and the remaining shared, dormitory-style rooms. Approximately half of the rooms are ensuite, while the rest are communal, reducing development costs and maximizing room space.

Understanding the Unique Dynamics

Investing in hostels requires a distinct perspective compared to hotels. Rather than evaluating investments per key, hostels are assessed per bed. Revenue per available room (RevPAR), commonly used in the hotel industry, is not as relevant for hostels, as they usually offer more than one or two beds per room. In the case of Beds & Bars, the group focuses on “revenue per available bed.” While competitors may report higher RevPAR, the greater number of beds per room fundamentally impacts this metric.

Knowles estimates that around 50%-60% of revenue translates to earnings before interest, taxes, depreciation, amortization, and rent (EBITDAR), with approximately half of that amount contributing to the bottom line. This understanding of the market dynamics poses a major challenge for investors and local authorities. Differentiating hostels from platforms like Airbnb, which also cater to budget accommodation, is crucial. Hostels not only offer social benefits but also prioritize safety and security, making them a far safer option for the targeted age group. Additionally, parents are more likely to trust licensed and registered hostels over unregulated accommodations.

However, hostels face challenges in obtaining recognition from local authorities, given the increasing restrictions on short-term lets. Securing unique licensing categories and establishing a clear distinction from platforms like Airbnb requires ongoing efforts. Despite these challenges, the industry continues to grow and remains a viable investment option.

Expansion Strategies

Beds & Bars aims to expand its presence in high footfall locations that attract the millennial and Gen Z audience. Gateway cities in European countries like France, Spain, Germany, Italy, the Netherlands, and the UK are the primary focus. The company also has expansion plans for Eastern European countries. However, Portugal is not currently under consideration due to restrictive regulations. The company’s expansion decisions are based on thorough market research, ensuring a comprehensive understanding before venturing into new territories.

A Compelling Investment Option

Considering the potential returns and the need to grasp the segment’s offerings, the hotel industry and investors should seriously consider hostels. The development and construction costs of hostels are significantly lower compared to hotels, resulting in greater returns on investment. Hostels cater to the world’s largest segment of travelers, boasting high occupancies and competitive bed rates. This success might leave budget accommodation providers, including Airbnb, feeling uneasy.

In conclusion, hostels present an exciting investment opportunity, and with the right approach, investors can tap into a flourishing market. By understanding the unique dynamics, overcoming challenges, and recognizing the potential gains, investors can make a lasting impact on the hostel industry.

Further Read

https://www.hospitalityinvestor.com/hostels/institutions-eye-growth-prospects-hostels