• Invesco takes hostel stake at Generator

Further evidence that hostels are gaining the attention of mainstream investors has come from Invesco taking a EUR60m stake in the Generator hostel brand.

The deal sees Generator’s owner and backer Patron Capital sell out a stake of up to 23% for the EUR60m payment, which will be invested to help drive forward the growth of Generator across Europe and the US. The brand currently has eight hostels in Europe with a total of 5,200 beds in Dublin, London, Copenhagen, Berlin, Hamburg, Venice and Barcelona.

“This transaction, via a global institutional capital partner, is a major proof of concept for hostels as an asset class and confirms Generator as a pioneer in this new breed of accommodation and a brand with a bright global future,” said Josh Wyatt, of Patron Capital, who is also chief strategic officer for Generator. “Since Patron acquired the brand in 2007, Generator has built a powerful global brand and revolutionised the hostel experience.”

And Erik Jacobs, director of hotel fund management at Invesco Real Estate, says the move is indicative of a shift in thinking at the investor. “Through our opportunistic strategy we are now extending our commitment to the hospitality industry beyond the traditional lease model. We are excited to be investing in the Generator platform as we see strong fundamentals supporting the hostel segment.”

Patron made its first commitment to Generator in 2007, buying into a family owned business with sites in London and Berlin. It has since invested a further EUR150m during 2013, to support the acquisition of further sites. Generator’s pipeline currently includes openings in Paris in February 2015, with Rome and Amsterdam following later in the year. As a result, the chain’s capacity will increase to almost 7,000 beds by the end of 2015, on the way to a target of 20 sites by 2018.

The Generator deal is a first commitment from a new Invesco fund looking to opportunistic investments, and is expected to provide more than just a benign financial input. “We see Invesco as a key partner in Generator’s ambitious growth plans,” said Patron’s Keith Breslauer. “Through the combined expertise between Invesco Real Estate and WL Ross & Co, particularly in the current US market, we will be able to continue to identify distressed assets to convert into successfully operating hostels – a proven ingredient in the Generator model.” Reports suggest that the expansion plans include possible openings in New York, Washington DC, Miami, Los Angeles and Boston.

A recent Euromonitor report, launched at World Travel Market, suggests the presence of hostels is growing, and is forcing budget and mid-range hotels to rethink their offer. In the UK alone, it is reckoned the market will continue to grow, reaching GBP216m of sales by 2018, when there will be 653 hostels in the market. It says the reborn concept is finding favour not just with the young, but with families, business people and single travellers “who appreciate the social aspect of staying at hostels for a price tag starting at GBP12.”

Also moving to test investor appetite for hostels are the team behind the Hoax luxury hostel concept. A little more than a year after opening their Liverpool hostel – promised as the first of a chain – the group have decided to sell the property, releasing the cash to reinvest in further expansion. Union Hanover and Starboard Hotels developed the property, with funding support from BridgePoint Ventures and IPIN Global.

The Liverpool property has 274 beds, set within 52 rooms created out of two former office buildings in the city centre. Rooms accommodate between 2 and 10 guests, each with an ensuite bathroom.

The next site for a Hoax has yet to be revealed, but it is understood the team are hunting for suitable buildings to convert in major cities in the UK and Europe. Starboard already has another hostel successfully operating in Edinburgh, under its Smart City Hostels brand; while Union Hanover and BridgePoint are actively advancing another hotel alternative, their Urban Villa serviced apartment brand.

 

HA Perspective [by Chris Bown]: Hostels are hot, meeting the needs of a younger generation who care less about having a private room, than they do about having a good time. Happy to share space, much like they did as a student, means lower accommodation costs, leaving more to spend on food, drink and gigs. And modern hostels offer high style, and highly central city locations.

In fact, this new breed of high design hostel has been renamed “poshtel”, meeting the needs of Generation Y’s “poshpackers”.

The fact that Invesco is prepared to take a punt on one of the leaders in the sector may be less indicative that hostels are considered mainstream, and more about Invesco’s efforts to grab a slice of some interesting action. Investors are opening their eyes to opportunities outside the mainstream; in the same way as an insurance company recently lent mortgage finance to hotel company Shiva, the old rules of finance are being rewritten, in the search for a good risk-adjusted return.

At Union Hanover, Eric Jafari leads an opportunistic team looking to create interesting new concepts allied to the hotel space. With Hoax having completed its first year of trading, he now feels the market can work out the value of having the hostel as a tenant; while the team can recycle the cash into the next project.

One area where Hoax has yet to strike gold is in its food and beverage offer. Hotel Analyst understands that initially the Hopskotch brand faced stiff price competition from the plethora of local bars and eateries in central Liverpool, and has had to be realigned with a more value-driven offer. As with other novel, high design yet good value accommodation options, the allied food and beverage offer needs to deliver a strong supporting income stream, and be attractive enough to appeal to non-residents. At Mama Shelter, for example, where Accor has taken a stake, the bars and eateries beneath the bedrooms deliver 65% of revenues.

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