Hostel takeover

You could hardly describe the hostel sector in Poland as it is now as offering a classic investment product – the market is fragmented, the operators are small companies or even individual people, while the biggest brands can be counted on the fingers of one hand. However, the sector seems to be on the brink of a revolution. The development of the hostel sector across the world is partly the result of the growth of the tourism sector globally. Another key factor has been the coming of age of younger generations (millennials and generations Y and Z), who want to travel for tourist and professional purposes but are still restricted in terms of their budget. The ideal location for them is affordable accommodation with basic additional services and the company of their peers – in other words, a hostel.

Queueing up across Europe

“All the major international hostel brands are considering entering Poland,” points out Borivoj Vokrinek, a partner in the EMEA strategic advisory and head of hospitality research at Cushman & Wakefield. “Paving the way for them was the opening of the first branch of the A&O chain in Warsaw in January, as well as the Joel Joe chain owned by Accor announcing its intention to enter the Polish market. It will debut in Kraków soon. Many international players are already present in other cities of Central and Eastern Europe – these include Wombat, which has a hostel in Budapest, as well as St Christopher’s Inns, Safestay and Plus Hostels with their accommodation in Prague. Meanwhile Meininger has announced a project in Budapest. Their eventual entry into Poland is only a matter of time,” he adds. The early stages of such a market developing represents a goldmine for the larger and braver players, who don’t have to worry about the competition from smaller and non-affiliated owners of individual buildings. “This is the perfect moment for A&O,” explains Phillip Winter, the chief marketing officer at A&O. “Tourism in Eastern Europe is growing strongly and its peak is still to come. Eastern European metropolises are really in vogue right now and low-cost airlines make travelling to these cities affordable for many people. The demand for affordable accommodation is increasing at the same time,” he adds.

According to a report by Phocuswright, which analyses the global travel market, Eastern Europe is set to become the third fastest growing hostel market (after South and South-east Asia and the Middle East), with an expected revenue growth of 11 pct. According to another report, published in January 2017 by Hostelworld Group, the largest online booking platform for hostels, Prague and Budapest ranked sixth and ninth on the list of the world’s most popular cities among hostel tourists, more than 70 pct of whom were millennials. Budding Polish markets have also placed well in the rankings, which bodes well for hostel chains. “For example, Wrocław has been bestowed with the title of ‘Best European Destination of 2018’,” reveals Yaniv Rosenberg, the real estate director of Selina Poland.

Capital from many sources

The hostel sector has clearly caught the attention of major international hotel operators. The most important players include Accor (the Jo&Joe hostel brand), Vienna House (R.evo) and even Hilton, whose hybrid brand Motto combines the traditional standard of the hotel with rooms equipped with the bunk beds characteristic of hostels. While individual hostels are not particularly attractive to international capital, chains are already attracting the gaze of investors. “The hostel sector has been taken seriously by investors for several years. This capital has a very diverse structure: these are strategic and financial investors, as well as funds or private investors,” explains Phillip Winter of A&O. “Also, the banks have recognised that hostels are good business – the profits that can be made from them are clearly higher and more rapidly earned than in the traditional hotel sector,” he adds.

“I get the impression that hostels have become tempting to investors who accept a slightly higher risk, are looking for an above-average return on their investment, and have more experience in alternative emerging markets,” believes Yaniv Rosenberg of Selina. “We have formed joint-ventures with local partners in each country we operate in, granting them the exclusive rights to own and develop property under the Selina brand in their region,” he reveals. “Under these transactions, the partners undertake to purchase or lease all our properties in the country, as well as to finance the necessary finishing work, and then also to leaseback or sub-lease the property. In return, Selina is committed to acquiring new properties, managing them and maintaining the cap rates at the market level,” says the director of Selina. Investors are also attracted to hostels because of the relatively low costs for the construction and conversion of buildings and the short time it takes to complete them. They are also attractive because the development of hostel chains can take place either through the purchase or lease of real estate, and (increasingly) through asset-light business models, such as management contracts or franchise contracts.

Not always so rosy

The most difficult task operators have is often to find the right properties. “Regardless of whether the buildings are new or converted, they first of all need to have an excellent location with good access to public transport and, in addition to that, be of a suitable size – usually a minimum of 5,000 sqm – to enable them to have the most effective operating scale,” insists Borivoj Vokrinek.

“In the search for the ideal location, we have to compete not only with the entire hotel sector but also with the senior citizens’ homes and student halls segments – all of which are looking for similar properties in the central locations of large cities,” admits Phillip Winter of A&O. “Once we find the right project – for sale or for rent – we are faced with the next challenge: organising the construction work. Our sector actually has an advantage in this respect due to the relatively low requirements for conversion and the generally shorter investment period,” adds the director of A&O.

“All the major international hostel brands are considering entering Poland,” says Borivoj Vokrinek of Cushman & Wakefield

Diversity in development

The modern hostel has long ceased to resemble the erstwhile youth hostel. The buildings (mainly those in large cities) are increasingly used by tourists who value comfort as well as freelancers working remotely. And these groups have much higher requirements than ‘backpackers’ – the former needs access to various types of urban attractions, and the latter to services such as a laundry or a work area. Which direction are hostels set to evolve in next? “We should expect a greater expansion of hostel brands and a further evolution of concepts – innovations will be seen in the more convenient room configurations, richer culinary offers, the introduction of intelligent furniture, increasingly functional interior design, the greater use of modern technology and the blurring of the boundaries between hostels and hotels with a growing number of hybrid buildings,” says Borivoj Vokrinek of Cushman & Wakefield.

Interestingly, it is not so much the case that hostels are drawing inspiration from the tradition and atmosphere of hotels, but the exact opposite. After entering the lobby of a Moxy hotel, you might start wondering whether you’ve come to the right place. “We took a great deal from the hostel format, mainly in terms of self-service for the guests and the entire community zone,” admits Katalin Vajda, the director of the Moxy Warsaw Praga hotel. “Our guests serve themselves using the catering service devices provided, for instance, by buying ready-made dishes in vending machines and heating them in microwave ovens. And if they prefer a different menu, there’s no problem with ordering any dish from another restaurant with delivery to the hotel room. And the main element of the hotel is its lobby, where you can spend time with people you have just met. At Moxy, there is nothing resembling the stiff, official atmosphere that prevails in traditional hotels. Each service staff member can, for example, be consulted on any matter. You can also play foosball with them,” he claims.

“There are a great number of factors that are influencing the development of the hostel market, but it seems that the most important one is the coming of age of generation Z, which amounts to 2 bln consumers worldwide,” points out Yaniv Rosenberg. “Our recipe for attracting guests is to secure world-class locations, a range of wellness facilities, coworking areas, top-class catering and drinks, in short: creating the conditions for trouble-free travel and working abroad – that’s what the travellers of the digital age expect,” insists the head of Selina Poland.