Investing in hostels: how to make a profit on budget accommodation
Hostels are increasingly popular around the world: they are cheap for tourists, profitable for owners and nearly always in the city centre. Higher yields, great locations and high occupancy rates have been drawing away a trickle of investors from mainstream accommodation.
A bed in a hostel is cheap and can cost anywhere between €7 and €60 per night depending on the location and how many people are sharing the room. The informal atmosphere, shared bathrooms and low degree of privacy truly set them apart from ordinary hotels. They pop up everywhere and can occupy a whole building or sometimes just one floor. Traditional hostels rarely offer private rooms, instead they focus on maintaining high occupancy rates in shared dormitories with bunk beds.
Low prices keep the rooms full
Demand for hostels is high due to low accommodation prices and lack of competition in the budget accommodation segment, which also kept these businesses afloat during the 2008 recession. Currently, up to 20% of tourists in the world are young people but only 5% of temporary accommodation providers target this consumer segment.
In the hostel world, occupancy in measured by bed rather than by unit as in the hotel business. According to Tranio calculations, the minimum investment to open a small hostel is
Annual yields range from 6% to 8% depending on the location and quality of the accommodation. For example, a hostel in Barcelona city centre costs about €1M and come with 6% average yields and 80% occupancy rates.
Services like food and beverage (F&B) make up about 15% of total revenue, but have 65% profit margin according to a 2013 report by HVS, a valuation company, on commercial hostels in Europe.
Such an investment can be paid off quite quickly, 10 years even, according to Tranio calculations, provided that the property is well managed.
The baffling birth of the “poshtel”
Times are changing and some hostels are growing out of their ultimate
Targeting a more sophisticated audience, poshtels provide services similar to the traditional hotel. Guests can book separate rooms (there are even penthouse suites) and have access to luxury amenities like swimming pools, gyms, cinemas and car rental services.
The price compass swings wildly from one service provider to another and by accommodation type (i.e. bed or dormitory). Prices can start around €25 for a bed in a dorm or €40 for a private room but in European cities such as Berlin or London, a single room costs about €70 per night.
Little is known about the margins generated by the
Price growth and liquidity guaranteed
Another central theme to potential earnings for these
For example, poshtel Once in Cape Town used to be an old loft and Kex in Iceland is located in an old cookie factory. U Hostel in Madrid is located in a 19th century palace and Palmers Lodge Swiss Cottage in London in an old private mansion.
How to evaluate a hostel’s potential
There is no doubt that this niche market is well worth a second look. As long as
- location (city/neighbourhood)
- ease of access: public transport, connections to air/rail
- proximity to entertainment, central activities
- share of independent tourists in the city
- laws on transferring residential/industrial property into a hospitality establishment
- laws on rental right as local legislation can make tenants hard to evict
Yulia Kozhevnikova, Tranio