Expanding brands are competing for leadership in Europe’s booming hostel space. UK listed Safestay has just announced record growth and profits, while Spanish rival CATS recently received major backing for its planned growth.
Also in play is hybrid hostel operator Meininger. Parent company Cox & Kings launched a sales process in September 2019, but recently The Times reported it will now go for disposal via a London listing. Leading the sector in scale, alongside the fast growing Meininger, is A&O, with 35 properties across Europe, while Generator has 13 European locations and has added two US sites.
Safestay has promised further growth for 2020, after a year in which it almost doubled in size. The group finished 2019 with 21 sites, and grew full year revenues 25% to GBP18.3m. Six deals completed through the year added eight sites, giving it 18 properties open, and three in development; two of these will launch in 2020. The company now has a strong network with a presence in key European cities.
Additions in 2019 included the midyear acquisition of a hostel in Pisa, which it rebranded. In the autumn, it signed a joint development deal for a hostel in Mestre, Venice that will have 660 beds, and will open in 2022; and it acquired the lease of an Athens hostel. The group has taken on hotels in Glasgow and Berlin, for conversion to a hostel operation. In December, the group agreed a EUR3.7m deal to take on Dreamgroup’s properties in Warsaw, Prague and Bratislava.
The group achieved 77.3% occupancy, up from 75.6% in 2018, while pushing average bed rate up 5% year on year. The launch of an improved website and booking engine led to a 50% increase in direct bookings.
“We’re very much at a tipping point,” chairman Larry Lipman told Hotel Analyst. “We’ll sell over a million bed nights this year.” With growth has come the opportunity to promote the brand more broadly, and amortise central costs across a larger portfolio.
A focus on food and beverage has paid off with a 43% growth in f&b revenues, now accounting for 14% of revenues. “The business is very young, so there’s still much to play for,” said Lipman. He said the group intends to operate f&b outlets under its own brand.
Further growth is likely to involve signing leasehold properties, “but it very much depends on the opportunities.” Lipman noted that banking facilities with HSBC have been extended, and, while there are no immediate plans, Safestay could tap investors for more cash if needed.
In Spain, investor KKR has teamed up with Excem Real Estate to grow a pan-European network of hostels under the CATS brand. The pair have set their sights on a 25-strong chain, with around 8,000 rooms. Initially, the brand consists of five assets, three hostels in Madrid and one each in Lisbon and Porto.
In his statement on the acquisition, Andrés Sánchez Lozano, CEO of Excem RE, said he would “rely on the knowledge of KKR within the hotel sector which, combined with our experience in real estate and 25 years of experience in hotel management, offers us a robust basis for growth.”
KKR executives pronounced themselves excited to get into the hotel market, building on the group’s experience and success in hotels. KKR’s recent investments in the sector include a hotel in La Villette, Paris, investment in Balearics specialist Intertur Hotels, and two Radisson hotels in Antwerp, Belgium.
HA Perspective [by Chris Bown]: I’ve been around long enough to remember a time when hostel groups struggled to get their concept across to early stage investors. The brands are now building scale and momentum, as a broader range of funders move in – their interest also piqued by the poorer pickings in hotels, due to investor competition.
The challenge, as ever, is finding sites. And Safestay has proved savvy in both buying up competitors for rebranding – a quick win – as well as picking off hotels for conversion, almost as fast. In fact, its only pure development is its big site outside Venice.
One thing that could well shape Europe’s hostel market is the eventual buyer of Meininger. If they give the group the impetus it has been missing to scale up faster, the competition for the lead in hostels could get really interesting.
Additional comment [by Andrew Sangster]: The arrival of institutional capital into the hostel market has helped shift perceptions of the accommodation segment but it still has a higher risk profile, and hence yield expectation, than branded hotels.
The likes of TPG with its investment in A&O and the buyers of Meininger will be banking on that yield gap closing over the next few years.
Data outfit STR says that hostel performance trends similarly to hotel performance but that other revenue (than beds / rooms) is hugely important to the bottom line. Over the last couple of years hostels have struggled to find much pricing power with rates bumping along with very low single digit increases (and actually down for the summer of 2019). Midscale and economy hotels have also trended down over the last couple of years but that is from a double-digit rate of increase to the stagnation currently being seen.
Part of the reason for the weak rate performance with hostels could well be related to the increase in supply. According to the booking platform Hostelworld there has been a 173% growth in the number of hostel properties listed in the last 10 years.
Part of the way to differentiate out of this is via strong brands that have good digital reach. Those concepts which deliver this plus have great ancillary revenues from things such as bars or activities look likely to be the future winners.