While hostel stays aren’t for everyone, new research suggests that the global hostels market will expand from $6.04 billion in 2022 to $6.35 billion in 2023, rising to $7.65 billion in 2027. The prospect of around 5 per cent annual growth has captured the attention of real estate investment platforms, and increasing trades at scale suggest that the segment is winning new, institutional fans. However, its complexities are not lost on market experts.
“The investment market is still trying to understand the hostels segment. While large platforms such as Generator, A&O or Meininger clearly have institutional appeal due to their size, much of the hostels market is highly fragmented,” notes Will Duffey, head of EMEA hotels and hospitality capital markets at JLL. He adds: “There's a huge gulf between platforms of scale and the multiple small players dotted around Europe.”
Although the largest and fastest growing hostels market globally is Asia-Pacific, the outlook for the hostels business in Europe is also positive. Hostels in Western Europe reached a market share of 34 per cent in 2021, according to the latest data, thanks to the granularity and range of destinations available on the continent and increasingly across the UK.
Secular trends further back the idea that the segment’s fundamentals are solid. Increasing volumes of solo travellers as well as Gen Z and Millennial affinity for hostels have boosted their investment credentials, while global macroeconomic headwinds continue to push accommodation offering keen prices into the spotlight.
“In a recessionary environment, price point becomes important to consumers, and limited-service structures have an appeal,” Duffey confirms.
Yet all this might not be enough to lure further institutions into the sector, limited fundamentally by the quantity of at-scale platforms available on the capital markets. It is perhaps for this reason that media reports repeatedly speculate over the future of the portfolios currently held by private funds, namely Generator and A&O.
A&O was founded in 2000 by Oliver Winter and operates 40 hostels in 25 cities and nine European countries. Texas-based investor TPG Real Estate bought the company in 2017 for an undisclosed sum, but Winter remains in the operational driving seat. The firm recorded a revenue of €70 mln in 2021 and 3 million stays, up on the 2.5 million nights of 2020. Yet media reports suggest that TPG may be seeking a buyer for the platform, which is currently the largest hostels group in Europe.
While TPG is often regarded as a classic private equity buyout firm with fairly long horizons, it has actually upped the frequency of its deals in recent times, with around a third of the 30-year old firm’s transactions coming in the last four years alone. Furthermore, it has increasingly allocated a wedge of capital to growth equity, a characteristic credited to its San Francisco roots by market watchers. TPG famously got a good deal on investing early into Uber, and also checked in to Airbnb in 2014, just six years into the unicorn’s growth story. Now, with hostels being tipped for further growth metrics, TPG might want to cash in on its A&O bet.
Post-pandemic travel may be exceeding all expectations to date, but war in Europe and global macroeconomic headwinds maintain pressure on the sector’s costs and revenues. London-based private equity firm Queensgate, which bought Generator Hostels from Patron Capital in 2017 for €450 million, had to seek a €600 million restructuring deal in 2021, in the wake of financial ravages provoked by the pandemic. While an existing €500 million of loans from HSBC, Société Générale and Aareal Bank were refinanced, Apollo Global Management also added an extra €100 million of finance to help shore up the platform. At the time of the refinancing, Queensgate was quoted saying that they anticipated a “rapid recovery” of the sector thanks to its “Millennial and Generation Z customer base”.
Despite this, Queensgate have since been linked multiple times with potential deals for the platform, which operates hostels on both sides of the Atlantic. Under Queensgate, the platform has expanded to include some 17 city-centre hostels – of which 15 are held as freehold assets – with another two being run under its burgeoning third-party management business. The group also owns four properties in the US operating under the Freehand brand.
The latest media speculation surrounds the mooted acquisition of Generator’s European platform by French private equity firm PAI Partners, for around €650 million.
PAI has a track record in limited service accommodation, chiefly through its campsite business, European Camping Group (ECG), which the private equity player acquired in 2021. ECG operates over 22,000 units, mostly mobile homes, across more than 310 campsites in destinations such as France, Italy, Spain and Croatia. The company is known for its Homair, Eurocamp, and Roan brands, and also acquired Vacanceselect in the summer of 2022, a campsite and mobile homes operator present in over 270 sites across Europe. At the time, Bertrand Monier, partner at PAI, said: “By offering value-for-money holidays, the sector has proved its resilience to downturns and is expected to be well-protected from the current volatile macro environment.”
However, to date, Queensgate is still listing both the Generator and Freehand assets in its “current portfolio” on its website, and no further details have emerged of a deal having taken place. Some might suggest that now is not the time to be exiting, with pandemic woes receding in the rear-view mirror.
Hostels have another key strength, as a hospitality segment known for having a relatively low carbon footprint. “Institutional investors in particular are focused more than ever on the sustainability of an asset.,” Duffey notes. “They will want to see extensive documentation around an asset's sustainability credentials and a credible path to net zero by 2030 before acquiring. We have seen deals that commercially stack up which don't go through because the asset has failed one or more sustainability criterion.”
Recent research from Bereau Veritas commissioned by Hostelworld found that hostels can be considered as much as 75 per cent less carbon intense than hotels, with their carbon emissions per bed averaging at 0.30 tCO₂e, comparing to hotel emissions of 1.18 tCO₂e.
Duffey concludes: “If you can offer a product which really tackles this aspect, and isn't about greenwashing or marketing fluff, it also resonates with consumers, who increasingly have the environment front of mind when they travel.”