Hostel: A budget accommodation provider that includes within its inventory shared rooms/dormitories and communal facilities and services.
Since their inception in the early 1900s hostels targeted the budget-conscious youth market, today this remains unchanged with millennials the current primary market. However, the modern hostel is no longer ‘roughing it’ in large sparsely decorated bunkbed filled dorms, with night curfews and daytime lockouts, the public areas actively engage day/night social interaction, and in addition to dorms, the vast majority of hostels offer private rooms, often en-suite. Fueled by millennials need for value for money, reliance on social media, creativity, desire to discover the world and passion for experiential travel, hostels have been amongst the most transformative accommodation sectors, and today, they have evolved into energetic lifestyle hotels, aka boutique hostels.
The hostel sector is highly fragmented with a large proportion of independent hostels and small domestic chains. Hostel brands with over ten properties account for less than 10% of hostels and less than 20% of bed capacity globally with little likelihood of change as the global hotel brands are still very new to the market. In a 2018 report published by Hostelworld, the leading specialised hostel OTA, it reported that the majority of hostel users are female and just over half travel alone and are seeking social connections. The pattern of hostel bookings for private rooms is similar as for hotels with seasonal peaks and predominantly prebooked single property, whereas for shared dorms bookings are less seasonal, with short booking lead-times and multiple destinations.
Not all hostels are ’boutique hostels’ offering a balance of privacy, style, amenities and social activities but it is these properties which fill this millennial niche market and have seen a significant supply growth, especially in emerging markets such as Eastern Europe. Other hostel sectors including properties listed under non-profit Hostelling International (see below) and independent hostels in the traditional or ultra-budget accommodation model.
Investment Advantages of Hostels
Hostels have several advantages over hotels both in development and operation, related respectively to flexibility and operating cost. Historically hostels were not scalable, but with convergence in the hospitality industry and changes in distribution, opportunities have opened up, and there is activity in the direction of using hostels as an institutional investment model. In recent years there have been acquisitions by private equity firms of small hostel groups, and cases were poorly performing legacy hotels have been converted to hostels.
Build Flexibility: From a development and investment perspective, the great advantage of hostels is their flexible configurations which allow for conversion into a much broader variety of existing building structures. By contrast, hotels have a rigid shape, and the ratio of room size (often determined simply by window spacing) to public area and quality of fit out become critical to their market sector and property feasibility.
Build Efficiency: With the flexibility of space comes efficiency and increased density of commercial areas, optimising the ratio of beds per square metre, reducing redundant space and increasing the turnover potential of a property. Even in the lower market sector, the higher density can effectively produce higher room rates and the higher volume of guests and the social nature of public spaces can deliver a food and beverage revenue per sqm. The profile of the travellers also usually eliminates the need for the provision of parking, further increasing the efficiency of commercial space.
Conversion Speed: The flexibility of the configuration facilitates conversion with a relatively low requirement for structural change, with a lesser need than hotels for conformity, existing structural features can be built into the interior design retaining local authenticity and expediting the conversion process.
Growth Sector: While traditional hostels are over 100-years old, the contemporary and dynamic model under development today is highly innovative and well placed to take advantage of the disruptive technological and structural changes occurring in the industry. Such hostels have seen rapid performance/supply growth, and with the fragmented nature of hostel ownership and branding, unlike some saturated sectors of hospitality, there are clear pioneer investment opportunities for individual properties and groups in marketing, reputation and economies of scale.
Additional Spend: While the core clientele, millennials
Brand Loyalty: With millennials, sound design and well orchestrated social activities can be rapidly rewarded via channels such as Instagram and with social media influencers, generating business through FOMO and brand loyalty. In a hostel, employees multitask and have a genuine connection to guests, sharing passions and breaking down formal employee-client barriers to create a social environment, a sense of friendship and belonging, for hotel operators and travel organisations hostels provide an entry point to tap into the millennial generation with their loyalty programs.
Broad Appeal: As OTAs have added alternate accommodations visibility has increased, review sites have provided property confidence, and images of contemporary dynamic design aided marketing hostels have gained access to, and interest from a much broader clientele beyond millennials. With the hybrid room configurations hostels are establishing themselves as genuine alternatives to hotel accommodation and travellers seeking local experiences, and social interaction will seek them out.
Hostel Planning
Main feasibility factors to consider when reviewing sites for as a potential as a hostel include:
- Walking distance to public transport
- Close to a railway or coach station
- Central location
- University town
- Popular tourist destination
- Coach drop-off access
A hostel is a community-based co-living/co-experiential environment, facilities and features that differentiate a hostel from a traditional hotel include:
- Dormitories
- Bunk beds
- Shared bathrooms
- In-room sink & mirror units independent from bathrooms
- Communal self-catering kitchen
- Self
– service laundry facilities - Vending machines
- Durable, easy maintained flooring
- Security lockers
A new range of relatively new lifestyle hotel brands such as Aloft, Canopy by Hilton, Indigo, Moxy by Marriott, Radisson Red, have borrowed from hostels such features as the rooftop bar, curated events, common (social/chill-out) area,
Distribution in Hostels
With the fragmented nature of the hostel industry and therefore previously a lack of access to central reservation systems, booking often required making direct contact to individual properties or reliance on walk-in availability. This limited booking access acted as a break on hostels competitiveness in the accommodations sector. With the emergence of OTAs and their subsequent broadening to alternative accommodations, hostels were able to challenge with budget hotel properties for business. Today approximately half of all distribution for hostels is through OTAs, mainly Booking.com, Expedia and Airbnb. Within the hostel space, there are several specialised hostel OTAs, including Hostelword and Dorms.com.
Hostelworld: PLC based in Dublin and founded in 1999. OTA with a distribution of 16,500 hostels and 20,000 other forms of budget accommodation, with 7.6 million bookings in 2018, over 90% from hostels. More than half of app and web bookings placed on mobile devices, with 61% under 30 and 80% of guests under 40 years of age. Under the structure of hostel booking, travellers pay a deposit to Hostelworld and the balance directly to the hostel.
Dorms.com Hostels Worldwide: Dublin based OTA founded in 2015. Market themselves as most specialised in the sector, with focus on backpackers and distribution only for hostels and private rooms, with 30,000 listed hostels.
Branded Hostels
The convergence of hostel and hotel is further clouded as developers have started to apply the hotel business structures of franchising and leasing into the fragmented hostel market, and recognising the opportunities of this niche market one major hotel operator has launched a new hostel brand. Leading branded hostel products include:
A&O Hostels: The largest privately owned hostel group in Europe, the first A&O hostel was opened in Berlin in 2000, and today while their 35 properties on mainly in Germany, they are also present in Austria, Czech Republic, Denmark, Hungary, Italy, the Netherlands and Poland. Properties are all centrally located or well connected to roads and public transport links; the hostels target backpackers on a budget, business travellers, and families. The business model is mainly owner-managed and leased, but they are open to franchising, such as the property in Prague. In January 2017 A&O Hostels & Hotels was acquired by private equity firm TPG (Texas Pacific Group) Real Estate.
Meininger Hotels: As of June 2019 Meininger has 25 properties and describes itself as a key player within the ‘hybrid hotel’ market and as an international budget hotel with hostel-like facilities. Meininger’s provides central locations and high-quality furnishings to people of all ages and backgrounds at an affordable price, so all types of travellers can explore Europe’s most vibrant cities. Bedrooms include traditional doubles, private rooms with multiple beds or a bed in a dorm. Hotels are tailored and adapted to the specific location; the market served by the hotel with a flexible design to accommodate a range of guests, such as school groups, families, individual travellers and corporate guests. The design of each hotel is based on a specific theme associated with the city and guarantees a distinct personality.
Generator: Offering high design, low price points, and magnetic social environments all properties include a range of room types from shared to private bedrooms, chill-out areas, bars, cafes and a variety of spaces for private-hire, from street-facing or basement exhibition spaces to penthouse suites and rooftops. Generator claims to be the fastest growing hostel brand located in central locations across Europe including Dublin, London, Copenhagen, Hamburg, Berlin, Venice, Barcelona, Madrid, Paris, Amsterdam, Stockholm and Rome. In 2017 Generator including its 15 predominantly freehold assets were acquired by Queensgate Investments. In September 2018, Generator opened its first US asset in Miami and in October 2018 they purchased the 148-room Courtyard by Marriott Washington D.C, which will be converted to a Generator property after the current management agreement expires in 2019.
Safestay: A UK based PLC listed on AIM, Safestay describes itself as is a leading player in the premium hostels market with 13 hostels in key European gateway cities in 2019 including London, Edinburgh, York, Brussels, Madrid, Barcelona, Pisa, Lisbon, Vienna, and Prague and a hostel in development in Paris. Hostels principally are owned or under long term leases but are open to franchise opportunities. In December 2018 the company raised capital of £10 million by share placement to fund expansion.
Jo & Joe the Open House: Brand developed by Accor, described as lifestyle economy, the fun of a hostel & the comfort of a hotel with enhanced F&B concepts and the best affordable place to sleep or eat in the destination. The first property was launched in Hossegor, near Biarritz in 2017, and a second in Paris in April 2019, as at June 2019 Accor list 8 properties in the pipeline including London, Budapest and Krakow. The brand programming details properties with 350-600 beds, 10-11sqm/bed, large dorms of 6+ with shared bathroom, small dorms of 4-6 inclusive of a bathroom, and private rooms and apartments with kitchenettes. Public areas include large food & events area, indoor/outdoor bar, shared kitchen, and ad hoc spaces for meeting or other use.
Other international hostel chains include Selina (48 hostels, S. Ameria, N. America & Europe), Zostel (36 hostels, India & Nepal), Nomads (34 hostels, Australasia) St. Christopher’s Inns (20 hostels, Europe), Mad Monkey Hostels (14 hostels, Australia & S.E. Asia), Dream Hostels (9 hostels, East Europe), and Equity Point (7 hostels, Europe & N. Africa).
Hostels group data from respective hostel websites as at June 2019.
Hostelling International
As distinct from the commercial boutique hostels are the non-profit Hostelling International that operates over 4,000 hostels in 90 countries via a partnership network of non-profit national hostel associations facilitating travel at a low cost especially for young people of limited means.
Legal Issue in Hostel Conversion
While the function of hostels and hotels are very similar, they may not be in classification, note that under planning regulations (such as in the UK), conversion from one to another may require planning permissions for change of use.