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The rise of the luxury hostel

15 May 2013 by
The rise of the luxury hostel

A new breed of luxury hostels have spied a gap in the crowded hotel market-place and are moving in fast. Emily Manson checks out finds out what the new bunk bed brigade is up to

Over a decade ago EasyJet founder Stelios Haji-loannou tried to revamp the hostel market, but it never quite took off. Ten years later and it's a different story. Luxury hostels are coming to the fore and it seems that operators, customers and financiers are all on board.

So after years of oblivion and stigma, how has the hostel market suddenly become so hip and cool? Eric Jafari, chief executive of Bridgepoint Ventures and financial backer of the soon-to-open Hoax hostel in Liverpool, said he is taking the space seriously because it is what the market wants in the aftermath of the economic crash.

"Pre-Lehman's it was all about glossy, aspirational products such as W and consumers spending more money than they had, but now, after the crash and with restricted access to cash, thrifty, retro, vintage and recycling has become cool," he explained.

Josh Wyatt, partner, hospitality and leisure, at Patron Capital, notes that the hostel concept is now being accepted by a much wider audience. "No one else was really doing it even five years ago, when it was mainly driven by family companies or local entrepreneurs," he said, "Now more groups are coming into the space and looking to ride the wave of the concept. It's great that people now view this space as an incredibly exciting and attractive market to be in."

But is there room in the market place for this kind of product? Duncan Simpson, head of corporate affairs at YHA believes there is still plenty of room for growth in the market as people want to travel more. "If prices are lower, then they can travel more, further or for longer."

Heiko Figge, former MD at Guoman and Thistle, who joined the Moorfield Group to oversee the development of Safestay hostels went further, suggesting it's an untapped gap in an otherwise over-crowded hospitality market. "It's a gap that hasn't been exploited as it should have been," he said. "There's plenty of hostel stock out there but a lot is indifferent. Rather like the indifferent midmarket hotel stock which helped the rise of the budget and three star branded market, so the hostel brands like Safestay have very quickly found a following and are getting great feedback."

Jafari added: "Many don't understand the market segment, but those who do are poised to make a lot of money out of the space as it's so underdeveloped and there's a lot of really bad product out there."

Sites Cleverly, because of its design premise, the hostel market can exploit sites which would not normally be viable for hotels. Wyatt explained that after the financial crisis a swathe of empty office buildings across Europe came on the market. "We had a concept, the capital, the strategy and vision to fill those properties." As the financial backer behind Generator hostels, Wyatt looks for sites around 70,000 square feet, in exceptional A-list locations but within C-grade office stock.

"The hostel concept works well with existing buildings in city centres that need a little bit spent on refurbishment, hence they go for a discount or good price," Jafari said. He added the model works through economies of scale, so where a budget hotel would need around 100-200 keys, a hostel concept can work with only 50 rooms. "Sites can be smaller, as long as they're central, there's a lot more latitude to make hostels work."

Simpson notes that unlike the YHA, which has sites in all sorts of locations, the current growth and opportunities is only being seen in cities and towns as "it's more difficult to develop outside these areas if you're looking for a fast return."

Cash Generators So does the concept make money? "Big time," said Jafari. "The few groups doing this are making a killing. The multiple bed factor is key to the financial model. In Liverpool beds cost £20 a night, so each room is driving around £120 per room in a market where that size of room normally generates £60 a room."

His colleague, Paul Callingham, managing director of Starboard Hotels and the operator behind Hoax, said that not only do they generate more cash per square foot than a Holiday Inn Express, there are increased upselling opportunities too. "One room provides upselling opportunities for six people, rather than one or two, so that's 260 people rather than the normal 50 per site. They are cash generators from that side."

Figge says it works for customers too as beds cost only around £18. "For people staying in town for a couple of nights who have reasons to be there other than just be in a hotel, it's a viable and inexpensive alternative to a hotel, especially in London, where budget rates are comparable to the mid-market."

Hostel attraction Victoria Melles-Sawyers, general manager of Safestay at Elephant and Castle said a hostel can conjure up images of social services to some people so she doesn't use the term, preferring posh-tel. "It's important to run it like a hotel," she explained. "It's staffed and cleaned like a hotel and just because it's cheap doesn't mean it has to be cheap." In fact the fixtures and fittings (as well as health and safety specifications) are very high due to the churn, but she has found "this means it doesn't deteriorate quickly and people seem to respect it rather than trash it."

Wyatt pointed out that the fundamental concept of a hostel will always differ from that of a hotel because of the difference in bed product. But, he added, a hostel can differentiate itself through its experience, hence the investment in public spaces: "To do it right, it should present a canvas of the local community and be populated by local artists, fashion and music. It becomes a tableau of the local community which visitors can become part of."

The key attraction is not the bunk bed, but the social aspect of the hostel: from fun bars to social events and community entertainment, Jafari said "The social aspect of a hostel is a great ‘value add'," he added. "Meeting people and the trendy common areas are exciting and give a similar F&B experience to what you would previously have had at a W or Mondrian."

At Hoax, the hostel will feature art by famous street artists, a retro vintage shop, a basement area where local vendors and businesses will be encouraged, and "every night there will be something going on, so it becomes more than just a place to stay."

Target Market Callighan sees the luxury hostel as a lifestyle choice "for people who want to find new friends and integrate into the city, not just because it's a cheap bed". This is especially attractive to the youth and student travel market, stag and hen groups, which as he points out, are "markets that hoteliers don't usually want." Meanwhile, Figge sees the product as also catering for specific markets such as tour groups, schools trips, university tours and even larger family get togethers. "People who want stylish accommodation but without having to pay over the odds," he added.

Competition But does the traditional budget or mid-market hotel sector need to worry? Wyatt believes that the new wider appeal of hostels may cannibalise budget hotel travellers to some extent but "only the junior executive/creative type who wants to be in the scene and have a boutique experience, yet can't afford to spend £200."

However Figge is less sure, arguing that luxury hostels are not going to prove a threat to the budget or boutique market.

"I don't think colleagues at Premier Inn or Travelodge need to worry themselves to sleep" he said. "It's the other hostel operators who have under invested in the property that are on their way out."

Brands in the Hostel Market to look out for

  • Generator Hostels
  • Smart City
  • Safestay
  • Hatters Hostels
  • The Clink, King's Cross
  • St Christopher's
  • Wake Up
  • Fresh
  • And coming soon Hoax, Plus Hostels & Wombat

What to expect at a luxury hostel, above and beyond the bunk bed and a clean, safe room

  • Daily serviced rooms
  • Ensuite bathrooms
  • Free wifi
  • Safe storage facilities
  • A full bar offer
  • A restaurant/dining area
  • A funky communal area
  • Urban/street art
  • Quirky design features
  • Activities utilising talent from the local community such as yoga classes or local DJ nights
  • Events like ping pong tournaments and karaoke competitions

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