The inaugural Hostel & Budget Traveller Conference (HBT) got off to a great start in November with news that institutional capital is starting to view the niche sector as attractive with major growth potential. Defining the difference between a hotel and hostel can be summarised as S = Social which is what increasing numbers of travellers (especially millennials) are looking for as opposed to the traditional hotel “box” room. Boutique hotels have long differentiated themselves (profitably) from mainstream mid market full service hotels but the ho[s]tel sector is catching up with brands such as Generator, Meininger and St. Christopher’s Inns upping the ante in terms of design, service, wifi and value for money.
Invesco partners with Patron Capital for 23% of Generator
Anyone familiar with Generator Hostels will know they are rapidly becoming more attractive to mainstream travellers and Invesco clearly sees the value of first mover advantage into this sector. The 23% deal with worth €60m values the company at circa €260m and based on 5,200 beds in seven cities across Europe, equates to a chunky €50k per bed demonstrating that this is a serious asset class.
Blurred Lines – When is a Hotel a Hostel?
Harry Douglass, senior associate, HVS posed the above question and stated that initially you have to define the business model; is it vacation rental v B&B v hostel v budget hotel? Commenting on segmentation Douglass said “Youth groups often underpin Ho[s]tel occupancy but tour groups account for 35%, single tourist 30%, families 10%, couples 15% and corporate 10%”. Harry singled out design as being a critical factor in the comfort of a private room and the fun vibe of a dorm room and he noted that the “pile them high stack them in” model is fast becoming a memory. Meininger, Tune, Bloc, Premiere Classe (Louvre), Qbic and citizenM have all captured the imagination of an ever more open minded traveller while limited service hotels like Premier Inn need the power of a brand to market these “standard rooms”.
Longer stay hotels require larger rooms e.g. (Aloft Hotel London Excel) and are design led. I think we are going to see greater blurring of the lines between budget/limited service and designer/boutique hotels as time progresses. While the mid-market is being squeezed there is more of an increase in the branding and definition of the segment. The hotel and hospitality industry lags a lot of industries and branding is only starting to permeate down through the quality levels.
Market performance and Insight
David Chapman, director general, WYSE Travel Confederation answered some burning questions like how has the segment weathered the storm? What are the current market conditions and the outlook for the future? What are the hostel and budget traveller hot markets and those to avoid? What are the needs of families, student groups, young and retired?
Traditionally the youth travel market was seen as “beer and beach” and not attractive. According to Chapman young people make up 20% of international travel arrivals and will be worth $336bn by 2020. This segment’s spending has increased by 40% since 2007 and 25% of these visitors return so they are a key target for any city. Positing the question “what is a millennial?” David valiantly attempted to categorise them as born after 1980, smartphone addicts and they return to visit places they visited in their youth. Taking it a step further the “flash packer” is the wealthy cousin of the traditional backpacker; they spend more on accommodation, local tours & transport, or take a short plane trip rather than bus.
He also noted the “social aspect is the [S] in the difference between hotels and hostels”. Public areas and free wifi are very important to travellers for the social aspect to meet peers and contemporaries. The UNWTO forecasts that International Tourist Arrivals will be 1.6 bn by 2020 (up from 1bn in 2010) and that youth travel will comprise 320m of these travellers. Can you think of any industry that is growing so fast with a steady pipeline of eager travellers from emerging & BRICS countries? The message is clear: the youth (Millennial) market is burgeoning and that boutique, hostel and alternative accommodation providers stand poised to capture a large share of travellers over traditional hotels.
Moderated by Nam Quach (head of leisure, Ernst and Young LLP) the investors explored themes around what do investors look for in a budget hotel or hostel deal, what are the returns / risks to capital and discussed bank financing vs. other forms of funding.
Delegates heard that the HBT sector lags the traditional limited service hotel sector and on the debt side the max LTV ratio is 60-65% in London and 50-55% outside London. Huw Zachariah, senior corporate banking manager, HSBC Bank commented that the bank looks at all segments of the hotel sector but the hostel/budget sector is dominated by entrepreneurial talent. HSBC does not finance leases e.g. Premier Inn or Travelodge and most of HSBC’s clients are exposed to operational risk but its still too early for institutional money to target this sector in his opinion.
Gerald Hörhan, executive director, Pallas Capital Holding AG gave us a clear message noting “the budget sector is still opportunistic but can attract institutional capital while in Continental Europe there is a convergence of the discount budget and student living sector”. He went to say that institutional investors don’t like management agreements as they “can’t play”. He also believes there are underserved markets in Eastern Europe in the budget sector and that properties with <70/80 rooms or <150 beds are uneconomical.
Erik Jacobs (director of transactions, Invesco Real Estate) recently invested 23% in Generator (owned by Patron Capital). Nam enquired what attracted Invesco to the hostel space and Erik opined that institutional investors are looking at the sector as this type of money becomes more comfortable with the budget sector and noted that franchises are more risky but will become more common in future. Invesco is looking to expand the Generator concept in the EU and USA and there is potential for a platform of hostel providers to grow cross border and become more attractive to investors.
I think a good example is where Accor has acquired a 35 per cent stake in boutique hotelier Mama Shelter for an undisclosed price. Mama Shelter, whose hotels and restaurants are designed in collaboration with Philippe Starck, plans to open hotels in Los Angeles, a second one in Paris, Lille, Zurich, Mexico City, Seoul, Amsterdam, Barcelona, New York and London. Founded six years ago by the Trigano family with the assistance of entrepreneur Michel Reybier, Mama Shelter creates hotels known as “urban retreats” and restaurants. Accor’s investment allows Mama to vertically integrate into a major international platform.
Innovative business models & differentiating yourself from the pack
Steve Lowy, CEO and founder, umi Digital chaired this session on topics including affordable luxury, budget chic, poshtels, hub, quality hybrid and next generation hotels and asked how are these brands differentiating and winning guests differently? Charlie Macgregor, CEO, Student Hotel also made a brief presentation on his company’s offering and John Nielsen, director, Azure Properties UK Limited described Azure’s 710 bed budget hostel in Berlin.
Markus Lehnert, VP, international hotel development, Moxy Hotels (by Marriott) was delighted that Milan is the first Moxy to open with 17.5sqm rooms, public areas to work, eat, meet and socialise: there are now 15 projects signed and Marriott is looking at 15 more units per year, working with IKEA on design. However Markus sounded a note of caution that with budget and economy hotels the manager is the most important part of experience. The physical part is 80% but the 20% is down to the team. Clearly Marriott is heavily invested in this “lifestyle” brand that delivers the style and soul of a boutique hotel but is more affordable.
This first HBT conference was a resounding success and hats off to Piers Brown, George Sell and the team for cajoling such a wide audience to attend – in particular the brands and investors. The pre conference tour of Tune Hotels, Clink & Generator hostels was a perfect way to network over a few drinks and to make new acquaintances and many thanks to Generator for sponsoring the reception. Some presentations are available to download here.
Weldon Mather is an independent hotel asset manager and tourism consultant in the hotel, restaurant and pub sector. He works with clients throughout the UK and Ireland including banks, owners and managers, receivers/administrators, liquidators and investors. Contact: www.wmconsultancy.eu Tel: +44 77845 46066 or +35386 8684441