If your only experience of hostels is creaking beds, grubby bathrooms, ramshackle common spaces and hungover reception staff, then you are seriously behind the times.

The hostel market has boomed in recent years, fuelled by travellers becoming increasingly discerning and operators realising that hostels were ripe for disruption.

The new generation of hostels are smart, hip and, crucially, still cheap. Young people are now spending more of their money on experiences, particularly travel. Research last year by peer-to-peer currency exchange business WeSwap found that almost 40% of UK adults said travelling was the top priority for spending their savings, up from just 14% the previous year.

We saw an opportunity to convert empty offices to hostels  

Keith Breslauer, Patron Capital

Until around 10 years ago, most hostels were so-called ‘mom and pop’ operations, run by single owners, often from a small to mid-sized building, and varied massively in quality.

Since then, a number of more professional operators have entered the market, offering a much more consistent service.

Hugely profitable business

“The first sign we had in terms of corporate activity was in 2007, when Patron Capital bought Generator Hostels, which then had just two properties,” says Paul Collins, CBRE’s head of hotel investment properties, UK and Ireland. “Patron identified that the hostel business was hugely profitable, relatively easy to manage and caught the wave of technological innovations such as online booking.”

At the time, Generator was a relatively unknown brand with one freehold property in London and a lease on a Berlin building. Patron spotted an opportunity, says the investor’s managing director, Keith Breslauer.

“We felt a large property filled with many beds on top of a cool bar with very good tech was very attractive,” he says. “We saw an opportunity to buy distressed and empty office buildings around Europe and convert them to the hostel format.”

Making a splash: Freehand, which provides a more upmarket offer, is set to expand after being bought by Generator

Generator grew rapidly and in 2017, Queensgate Investments bought the business from Patron for around £400m. Other major investment deals have cemented hostels’ position as hot property: TPG Real Estate bought A&O Hotels and Hostels in 2017; and last year, BlackRock Real Assets entered the market with the acquisition of a pan-European hostel portfolio as part of a €100m (£85m) joint venture with Amistat International.

According to Savills, UK hostels should appeal to investors as the market is far less mature here than it is elsewhere. A recent report from the agent found that London has around 2.8 hostel beds per 1,000 overseas visitors aged between 16 and 34, compared with around 11.2 hostel beds per equivalent visitor in Berlin.

People realised if you run hostels professionally, you make a lot of money  

Alastair Thomann, Generator

Larry Lipman, chairman at hostel operator Safestay and a serial entrepreneur who previously founded self-storage business Safestore, says growth in the sector is only just starting.

“I’ve always looked for opportunities where there’s proven demand, market fragmentation and poor-quality product,” he says. “The opportunity and demand have always been there, but it is the product that has been lacking.”

Competitive pricing

Safestay favours a front-of-house operation more akin to a boutique hotel than a traditional hostel, while the rooms are more utilitarian. Nightly rates for bed spaces are around the £20 mark; Safestay deliberately prices them competitively, effectively offering the same price point as poorer-quality rooms in similar locations.

Its hostels are much larger than many traditional establishments, enabling the company to take large groups such as school trip parties or sports teams, which bolsters its earnings.

The brand has also been careful to locate its hostels in prime, tourist-friendly areas in major cities, Lipman says. It has 21 hostels in 12 countries and last year the company received bookings for one million bed spaces. The brand hopes to expand its number of branches to 40 in the next couple of years.

According to Lipman, Safestay differentiates itself from budget hotels by offering a fun experience. “Safety, cleanliness, fun and a great environment – that is what is growing the market,” he says.

We have to see key performance indicators emerging and more trading 

Paul Collins, CBRE

Generator also offers its guests experiences such as ‘stitch and bitch’ knitting classes and a tie-up with ice cream brand Ben & Jerry’s has also proved popular among guests. Generator chief executive Alastair Thomann says guests are willing to pay “10 times more for a meal than for a bed for the night”.

But it is the professionalisation of the market that has really propelled its rapid expansion, he adds. “It’s brands like Generator and [German brand] Meininger that have grown. People realised that if you run hostels professionally, you can make a lot of money.”

By selling multiple beds per room, hostels can make as much per room as a three- or four-star hotel, but have the running costs of a two-star property. Operators can convert a wide range of buildings into hostels, making it a sector that is easier to enter than many others.

Big brands move in

Traditional hotel brands have spotted that the market is on the up and are getting in on the act. Global hotel chain Accor launched its Jo & Joe brand in 2018, which so far has just two hostels in France but plans to open up to 50 across the world.

Jo & Joe says it offers an ‘open house’ concept, with vibrant communal spaces and regular events such as yoga classes, alongside the dormitories and low prices you might expect.

Meanwhile, in November, KKR and Excem Real Estate formed a joint venture to launch pan- European hostel brand Cats.

Having an established hotel brand attached to a hostel portfolio can improve investor confidence. Hostels also have the advantage of a strong underlying revenue stream and because room rates are so cheap, cancellations are less of a problem.

“A hostel’s offering can produce brand loyalty,” says CBRE’s Collins. “People become familiar with the Accor brand, for example, and move from Jo & Joe into [other Accor brands] such as Novotel or Fairmont.”

New generation: brands such as Generator have bought a higher level of professionalism to the sector

Collins thinks other hotel chains, such as Hilton, are bound to follow suit and enter the hostel sector.

Lipman does not think the potential for corporate expansion in the British hostel market will kill off traditional smaller operators. “I think many will stay, but the market will split as it matures and demand grows,” he says.

Safestay is looking to open more hostels in UK cities including Manchester, Liverpool and Bristol, as well as “primary cities” on the Continent, including Venice in Italy and Marseille, Nice and Lyon in France.

The market also offers opportunities further afield. While there are already a great many hostels in Asia and Australia, the US market is almost non-existent.

Generator hopes to steal a march on others looking to open hostels in the US. It recently opened outposts in Washington DC and Miami, and in October bought its US competitor Freehand for £316m.

Generator and Freehand will continue to operate as separate brands, but the operator will achieve economies of scale by using the same back-office staff and systems.

New market foothold

Freehand operates an 80% private room/20% shared room model, which is almost the opposite to Generator, giving the company a foothold in a new part of the market more akin to a hotel than a hostel.

Freehand’s new owner is weighing up plans to expand the brand across Asian and Middle Eastern markets. “We have demand from property owners in Asia and the Middle East to put a hostel brand on their real estate,” says Generator’s Thomann. “That’s not where we’re going at the moment, but the fastest way to grow is through franchise and management deals, and I think you’ll see us do that.”

As exciting as the market is, opinion is divided about what needs to happen next if it is to really take off. “We have to see key performance indicators emerge and see some more trading to understand where yields are,” CBRE’s Collins says. “We see hostel groups growing and buying, but it would be helpful to see more transactions between hostel businesses.”

Thomann is more bullish. “The sector will absolutely explode in the next five years,” he predicts. “We will see consolidation of brands and more capital entering the market.”

Whether it happens in the next five years or 10, it is clearly not a matter of if the hostel market will blow up in the UK, but when.