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Substantial capital moving into European hostels

Brookfield Asset Management acquired the European business of Generator Hostels last year in a transaction valued at €776 million. The deal brought 15 properties across ten countries into Brookfield’s portfolio, and the investor has since spoken openly about the opportunity to scale Generator further through acquisitions and management agreements.

Another of Europe’s largest operators, a&o Hostels, completed an €874 million refinancing with Apollo earlier this year. Alongside equity commitments from StepStone Group and Proprium Capital Partners, the financing supports plans to double the size of the business. By July, a&o said it had acquired approximately 11,500 beds during the previous two years.

The scale of those commitments brings a part of the accommodation market traditionally associated with independent operators and backpacking increasingly into the view of major hospitality investors.

There remains plenty of room to grow. Christie & Co estimates there are around 600,000 hostel beds across Europe, while around three-quarters of European youth-hostel revenues are generated outside the three largest operators. JLL reaches a similar conclusion from a different measure, estimating that the five largest brands control only around 8% of the European hostel market.

That fragmentation is sitting alongside considerable activity from operators seeking scale.

In Manchester, a&o acquired two adjoining hotels previously operating under Accor’s ibis and Novotel brands. Following an £8.2 million refurbishment, the buildings will provide 303 rooms and 1,218 beds when work is completed, with accommodation divided between dormitories, private rooms and family rooms.

The Manchester development provides an interesting illustration of how an existing hotel can accommodate a different operating model without requiring an entirely new property.

a&o is taking the principle considerably further in Berlin, where it has acquired a vacant 31,000 sq m office building near Checkpoint Charlie. Around €40 million is being invested to create 610 rooms and approximately 2,500 beds, with completion targeted for the first quarter of 2027. The company says it will become Europe’s largest hostel.

Reuse is not a new tactic for a&o. Founder and chief executive Oliver Winter recently said that only three of the company’s 44 operating properties were ground-up developments, with the conversion of existing buildings forming a longstanding part of its model. Existing hotels are particularly attractive because much of the infrastructure is already there and, depending on the market, fewer change-of-use complications may arise.

The ability to accommodate more guests within the same building also changes the property economics. JLL estimates that high-density hostel layouts can generate substantially greater revenue density than standard hotels in some city-centre conversion projects, potentially making buildings viable where other hospitality formats struggle.

Alongside changes in ownership and property use, the customer proposition is broadening.

Christie & Co identifies backpackers, educational groups and solo travellers as remaining fundamental to the sector, while families, couples, young professionals and business travellers are increasingly part of the mix. Private accommodation, communal areas and more developed food, beverage and social propositions are widening what can sit behind the word hostel.

Again, Manchester provides a useful example. Only 40% of a&o’s rooms there will be dormitories. Private rooms and family rooms will each account for another 30%, placing several types of accommodation within the same operation.

The signals are therefore appearing from several directions. Large investment businesses are committing capital, established operators are expanding, hotels and offices are being converted, and the accommodation itself is reaching beyond the traditional hostel guest.

How far that develops remains open.

Hostels do not need to replace hotels for the movement to become significant. They can simply become another increasingly established part of a more diverse accommodation market, offering different combinations of price, privacy, experience and density.

The capital now moving into the sector suggests more investors are beginning to look at exactly that possibility.

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