While serviced apartments have fared relatively well during the Covid-19 crisis, another hotel alternative, hostels, has struggled to cope with lockdown, and with finding business thereafter.
With a consumer base founded on the young, footloose traveller, and an accommodation offer based around shared space, operators in the niche have suffered from scarcity of guests, and from the challenge of meeting distancing rules.
At UK listed hostel operator Safestay, Covid-19 has hit the group hard after a period when it grew strongly and was looking forward to scale efficiency gains. Towards the end of August, in a trading update, the company declared: “The directors believe that Safestay has the infrastructure in place to manage the re-opening of hostels and re- engagement with its customers and that ultimately, Safestay will find the route to returning its portfolio of hostels to pre-COVID-19 occupancy levels.”
Safestay spent 2019 transforming its business with a raft of deals. In June, it spent EUR3.25m buying a 161-bed hostel in Pisa, Italy. September saw the arrival of an addition in Glasgow, where it bought a Best Western branded hotel for conversion. And a joint venture agreement with EOS Sicav in Italy committed the pair to develop a 660-bed hostel near Mestre station in Venice. In October, the company bought an established hostel in Athens for rebranding, giving it a presence in the Greek capital. In November, it acquired a hotel in Berlin, for conversion to a 150-bed hostel and taking the portfolio to 18 sites.
With unfortunate timing, Safestay spent EUR2.7m in the first quarter acquiring hostels in Bratislava and Warsaw from Dreamgroup Management.
With the August update, Safestay presented a base case for the business that envisages all the hostels reopened, with 30% occupancy in the last quarter of 2020, rising to 40% for the first two months of 2021. A low case foresees two hostels, in London and Barcelona, staying closed until 2021, with Q4 at 15% occupancy, and early 2021 rising to just 25%.
By mid-August, the company said hostels open for more than five weeks saw an average 39% occupancy in their fourth week. With most bookings now last minute, it said there was little feel for forward business.
As it stands, Safestay expects to breach banking covenants with HSBC at the end of 2020, and is negotiating further lenience; there are also plans to sell and leaseback freehold properties in Glasgow, Pisa and York, if necessary.
“This is a challenging period but I am confident that in time we will get back to normal,” said chairman Larry Lipman. “We are working closely on a range of options to strengthen our financial position, which may not be required but will be an additional comfort to have. We know we have a good cash generative business and while the current market is challenging we have a clear strategy for addressing it and as importantly for moving back to being fully operational.”
At privately held hostel group A&O, CEO Oliver Winter told Hotel Analyst that worries over fresh lockdowns in central Europe were overshadowing a summer where bookings, if not profits, had rebounded after the shock of the second quarter.
“We had a great recovery in July and August, especially in Germany where domestic business was good. Now, we are seeing new travel restrictions.”
The operator has been in business for 20 years and has 41 hostels across Europe. It is backed by American investor TPG Real Estate, which bought the business in 2017.
Winter said openings had continued largely as planned, despite some Covid-related delays in construction. “We opened our second asset in Copenhagen last week,” one of three openings this year, and following hard on the heels of the launch of a 412-bed property in Budapest, Hungary. Further properties in Heidelberg, Florence and Barcelona are in the pipeline, though Winter said he expected to see delays to the Barcelona timeline, due to city permitting issues.
During the lockdown of earlier in the year, the group was obliged to close its Venice site, but said Winter, with payroll at around 10-15% of total costs, “ we decided to keep every asset open – it was better to maintain visibility.”
A&O implemented its “hygiene project” with a two-day seminar to teach general managers how to adopt a new role of hygiene officers. “Now, the biggest challenge is to keep people motivated,” said Winter, in a role where masks and screens compromise interaction with guests, but remain a necessary part of operations.
Winter said rates are down 30-40% on the previous year, and occupancy has been compromised by Covid-19 restrictions. In a typical A&O hostel, half the rooms are twins, and half are configured for 4-6 beds. “All our rooms are en-suite – that’s a big benefit.” Depending on local regulations, just two beds in each of the larger rooms can be sold, if the occupants are not from the same family.
But Winter said the big hit has been group business, which typically helps fill the group’s larger, shared rooms. “What we are totally missing, is school and sports groups.” He said that after being missing all summer, September saw a return of just 20% of normal levels of that sector.
HA Perspective [by Chris Bown]: What unites hostels and big hotel brands? A need to see the return of group business. While Marriott may be fretting about corporate conventions, the demise of student, sporting and school group travel due to Covid-19 is equally hitting the hostel business.
Those operators with shared washrooms, or with a preponderance of larger shared rooms, will be suffering greatly so long as Covid-driven occupancy restrictions are in place. Allowing just two people to stay in an 8-bed room is going to hit revenues substantially, as Safestay’s estimates note.
And for groups that have been spending heavily to expand, such as Safestay, the immediate future is tough. It will need all Lipman’s undoubted financial skills to retain the support of its backers, until the backpackers of Europe are out and about again and revenues start to return to some sort of normal. Until then, the pips are squeaking.
Additional comment [by Andrew Sangster]: The fortunes of pure play hostels contrast strikingly with how well hybrid concepts are being perceived. While Safestay is seeking to shore-up its financial position CityHub has signed financial deals to deliver 10 new locations during the next five years, the latest being in Copenhagen which opened last week.
Investment bank NIBC and bank ABN AMRO have provided financial backing for the roll out at CityHub.
At first glance, it is hard to see how CityHub, which offers tightly packed rooms and shared communal spaces, is well positioned during the current phase of the pandemic. CityHub’s concept sees people sleep in interlocking rooms where the bed space of the adjacent hub is either under or over the other hub – a bit like a L-shape interlocked with an upside L-shape.
But CityHub is touting itself as the next generation of hybrid hotel-hostel concept, emphasising “responsible” tourism. According to founder Pieter van Tilburg it is focused on providing “curated experiences that benefit the cities we are in.”
In Copenhagen, NREP, a Scandinavian-focused real estate investor that touts its innovation credentials, was convinced enough to sign a lease for the Cityhub property, which offers 216 hubs.
For its part, NREP has raised EUR1.9bn to put into “under-served real estate segments across the Nordics” during the pandemic. “Customer-centric” residential properties, care homes and modern logistics were stated as the main focus for the fund. But hotels and flex office are on the list too.
In reality, hostels are hardly a tired concept and will again find their growth legs once the pandemic subsides. In the meantime, expect a lot of talk about pivoting towards a hybrid model.