Millennials (those born between the early 1980s and the mid-1990s) love to travel and that doesn’t look set to change any time soon. A 2014 report by World Youth Student & Educational Travel Confederation and the United Nations World Tourism Organisation suggested that millennials accounted for 23 per cent of all international travellers. In the UK, according to the Office of National Statistics, youth and student travellers contribute £22.3 billion to the country’s economy, representing more than the top 20 football clubs combined. 

With 70 per cent of hostel-users being in this age bracket it’s perhaps no surprise that the industry has witnessed strong growth. The rise of these experience hungry ‘tripsters’ have revolutionised the way we travel, from forging the sharing economy to reinventing hostels with high-design values.

The shift in travel style has gone hand in hand with the transformation of the sector, fuelling the rise of branded hostels as a popular alternative accommodation. The establishment of new brands such as Jo&Joe launched by AccorHotels in 2016, and rapid expansion of existing brands such as Meininger, highlights the growing appeal of the millennial demographic and opportunities within the sector.

The hostel sector has recently undergone a rejuvenation and there has recently been a flurry of corporate activity. In the past 18 months two of the largest hostel platforms in Europe were acquired by private equity investors. Queensgate Investments purchased Generator Hostels in a €450m deal and TPG acquired A&O Hotels and Hostels. These transactions exemplify the increasing attractiveness and potential of the hostel sector to investors not least because, according to figures from Phocuswright, by 2020 the hostel market is projected to grow by 7-8 per cent year on year on a current value of $5.2 billion in bed revenue.

Underpinned by the burgeoning growth in young international travellers, hostels provide lean and efficient business models, presenting investors with an attractive growth and yield proposition. They are a volume-driven business coupled with low operational costs reflective of a price sensitive guest segment. 

So where are the opportunities? Supply, relative to potential demand, remains constrained across most European gateway cities pointing to expansion opportunities, such as in the UK where hostels account for just 1.41 per cent of room supply and 0.23 per cent of the active pipeline. Smaller hostel chains across Europe offer excellent platforms for investors to enter and further consolidate the market.

Overall, we predict that this immature sector will continue to grow from strength to strength, presenting opportunistic and forward thinking investors with an excellent opportunity to capture capital and secure income growth across a global hostel platform as the younger demographic continue to push the boundaries of travel, hostel operators are in a good place to respond.

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