Article | Intelligent Investment

What makes hostels an attractive investment class within the wider hotel sector?

September 13, 2022 4 Minute Read


The post-pandemic recovery of the hostel sector is well underway. It is well placed to emerge stronger and continue to gain market share against traditional serviced accommodation sectors. This reflects:

  1. Consumer shift towards experiences: The hostel sector is where travel-hungry consumers go for authentic local experiences. This structural shift in consumer demand from goods to experiences, further accelerated by the pandemic, presents an opportunity for hostels to capitalise.
  2. Generational shift: In 2019, 44% of total tourism nights by EU residents (domestic and outbound) were taken by people aged 15-44 years. This highlights the growing significance of the Generation Z and Y cohort as they enter their prime spending years. Both generations are also known for their “Wanderlust” and are more likely to travel than previous generations. This should further benefit the hostel sector, which typically appeals to the 18-35 age group.
  3. Economy Segment: Hostels are at the budget end of hotel spend. The current economic backdrop, with high inflation rates and reduced disposable income should support the recovery of the wider economy segment, particularly those accommodation providers that are able to deliver a strong value proposition.

According to Hostelworld, an online travel agency focused on the hostelling category, the recovery of the sector is well underway with bookings in June 2022 reaching 80% of pre-pandemic levels. In particular, demand into Europe recovered strongly with bookings in Southern Europe exceeding 2019 levels.

Hostel operators that are benefitting most from a rebound in demand are those that are able to successfully differentiate themselves from the conventional “backpacker hostel” as well as the traditional economy focused hotels. These include “poshtels” and “hybrid hostel” concepts, which unlike conventional hostels, are more design-driven. They also offer an increasing share of private accommodation as well as restaurant and event space and therefore appeal to a wider range of customer types, including families, couples and corporate travellers. The lifestyle offering coupled with a wider customer base, allows these hostels to command a premium to conventional hostel pricing. Generator, Freehand, Meininger, A&O and Selina, are examples of hostel groups that have successfully redefined the conventional hostel product by lifting quality standards and providing consistency of product in a variety of markets.

The growing appeal of the hostel sector has attracted institutional investors. Notable transactions include Queensgate’s acquisition of the Generator and Freehand portfolio, TPG’s purchase of the A&O portfolio, and BlackRock’s €100m joint venture with Amistat International.

Despite the expansion of some hostel brands in recent years, the sector continues to be an undersupplied asset class. CBRE estimates it accounts for around 7% of the total accommodation supply in key European cities. The hostel sector also remains a highly fragmented market with the three largest international hostel groups (A&O, Meininger, Generator) only accounting for an estimated 7% of the total hostel supply in Europe. The undersupplied, highly fragmented sector presents a strong opportunity for branded hostel groups to gain market share.

Taking in all the factors above, we anticipate the hostel sector will gain further momentum across the European tourism industry.

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