Why should investors be backing hostels rather than hotels? What are the challenges and risks as well as the gains to be made? Research suggests that the global hostels market will expand to $7.65 billion in 2027.

“It’s been a lucrative business, certainly post-Covid,” says Luke Knowles, strategy and development director at Beds & Bars Group.

“It’s also a hugely underdeveloped and under-bedded sector, particularly in western Europe. For the target audience that we have – Gen Z, Millennial, the largest segment of travellers in the world – there are only two or three large hostel chains, making up about 10 percent of the total bed stock in Europe.

“The majority of hostels are still smaller, individual owner-operators, not necessarily utilising the space that they’ve got, and there’s a huge opportunity for someone to come in and really consolidate some of that market and drive the growth.”

Beds and bars

Beds & Bars Group operates more than 20 hostels across the UK and Western Europe comprising around 4,500 beds with a turnover of around £65 million. It splits its accommodation and F&B brands, for example its Belushi’s late night party and sports bar venues, which are situated beneath or beside its St Christopher’s Inn accommodation offering.

During peak season, about 70 per cent of custom comes from independent travellers and the remainder through groups. During low season, the business will use groups to drive occupancy and will slightly bring down the yield to fill beds and secure revenue through other avenues, particularly F&B. Around 40 per cent of revenue is direct.

Knowles highlights that, due to the lower price point, hostelry is a resilient market to socio-economic downturns, with St Christopher’s properties returning to 90 per cent occupancy and above “very quickly” after reopening post-pandemic.

Beds & Bars is primarily looking at conversion opportunities, and its bed mix in a building tends to be around 15% private rooms, 10% capsules, and the remainder shared, dormitory-style. Around half of the rooms in a building will be ensuite, with the rest communal.

“That lowers the development cost and maximises the room space,” says Knowles. As for exit options, he estimates the IRR at around 25% in terms of freehold unit investment.

Understanding the market

However, to understand the market means acknowledging that hostels operate differently to hotels. “We don’t look at our investments per key, we look at per bed,” points out Knowles. Rather than revenue per available room (revpar), given that hostels in most cases will have more than one or two beds per room (in Beds & Bar’s case, it has an average of five beds per room), the group focuses on ‘revenue per available bed’. While competitors may be seeing a higher revpar, he stresses, the higher number of beds per room fundamentally influences that metric.

“We’re looking about 50 per cent-60 per cent of revenue EBITDAR, of which then about half of that, maybe a little bit less, is going down to the bottom line,” he adds.

This comprehension is one of the major challenges for the market, whether that’s investors or local authorities. Knowles sees Airbnb and budget accommodation as direct competition, highlighting that the hostel market can differentiate itself from Airbnb not only with its social benefits but also its safety and security.

“It’s the far safer option, and with our age group, parents would be far happier with them coming to us than staying with something that’s not licensed or registered,” he argues.

But differentiating the hostel market from Airbnb in the eyes of local authorities has been a challenge in light of increasing restrictions on short-term lets.

“Sometimes it’s challenging to make sure we get differentiation, have a new licensing category for us. But we’re succeeding, we’re still growing and it’s no more or less challenge than a hotel,” says Knowles.

It has also been challenging having to explain the business model each time to investment firms, developers, and brokers. Although it has historically been a developing industry, Knowles says, “We’ve now got some very big players in this industry who have a fabulous offer… it needs to be seen as certainly a viable investment option for firms out there.”

Expansion plans

Beds & Bar’s expansion plans are focused on high footfall locations that attract the millennial/Gen Z audience in gateway cities in European countries such as France, Spain, Germany, Italy, and the Netherlands, with continued expansion plans for the UK as well as “further east”.

Portugal, however, is not currently on the cards: “We’ve done a lot of our own research with consultants, architecture etc to make sure we understand a market before we look at it. We’re not actively looking in Portugal at the moment – although we’d love to be there, it’s just too restrictive and we’re not going to spend our time and energy somewhere that’s too restrictive,” Knowles explains.

Against this backdrop of potential returns to be made and the major challenge to overcome being understanding what the segment can offer, Knowles argues that the hotel industry, including investors, should be taking hostels seriously: “Development and construction costs of a hostel are far lower than you would see in a hotel with far greater returns on that investment,” he says.

“We’re a first-route option for the largest segment of travellers in the world. We’re having huge occupancies and great bed rates coming through and if I were some of these budget offer accommodation providers, I’d be nervous.”

All those quoted in the article appeared on stage at the International Hospitality Investment Forum (IHIF) held in Berlin between May 15 and 17, in a session called: Investment Pitch: Untangling the hostel model.