When Jacques Du Plessis spent a month in Dublin this year, he decided to stay at the Generator, a hostel with a screening room, “ladies jacuzzi suite” and a bar with chandeliers made from Jameson whiskey bottles.
“In a budget hotel, you’d be anonymous,” the 36-year-old South African said in an interview. A hostel is “more about experiencing the traveling vibe.”
Introducing the flashpackers: millennials in their 20s and early 30s who are choosing upmarket hostels rather than traditional hotels to swap travel tips over craft beers in trendy bars before retiring to a spotless dorm room.
Their spending power is attracting investors including Fonciere des Regions, Patron Capital Partners and Invesco Ltd. to lodgings that offer a higher standard of accommodation than the downmarket facilities traditionally favored by backpacking students, and are more profitable than budget hotels. Fonciere des Regions has set aside as much as 400 million euros ($450 million) to invest in European hostels through 2018.
Hostels are “super-attractive” to investors because the companies that operate the properties look after them, said Philippe Le Trung, head of corporate development at Fonciere des Regions. “They need partners to develop new things.”
Investors are seeking yields in less traditional property markets after the capital available for investment in real estate assets globally rose to a record, cutting rental returns.
Flashpackers spend more than 800 euros on accommodation during a trip compared with about 500 euros for tourists, according to Stay Wyse, because they normally stay longer. Spending by young overseas tourists around the world rose 40 percent to $230 billion last year from 2007 and is forecast to rise to $336 billion by 2020, the company that represents the global youth-travel industry said.
Hostels are “catering more for what millennials want, like and need in terms of accommodation versus traditional baby boomers,” said Howard Roth, head of global real estate at auditing firm EY. Among investors, “there’s the mindset and the appetite for anything that can create a yield.”
Operators have to get the design of the hostel right and include a local feel to lure flashpackers, Josh Wyatt, a partner at Patron Capital, said in an interview at the Generator in London. That building has a replica of a red London double-decker bus in the bar.
“If you don’t have cool design, if you don’t have interesting art, if you don’t have thought-provoking spaces, you’re behind the game,” Wyatt said.
Invesco Real Estate, which manages $61.8 billion, in November agreed to pay 60 million euros for as much as 23 percent of Generator, which will be used for new projects. The hostel operator is close to buying properties in Miami and Los Angeles, according to Wyatt.
New York, Washington and Toronto are also on Generator’s target list as part of a plan to increase the number of beds by about 50 percent to 10,000 in the next two years, Wyatt said. Hostels normally cost about 25 percent less to construct than budget hotels. It will also consider franchising in the longer term, Executive Chairman Carl Michel said in an interview.
An upmarket hostel generates about 25 percent more revenue than a three-star hotel because of the extra beds, Wyatt said. That makes Generator “very attractive for institutional investors or potentially the public markets.”
The money set aside by Fonciere des Regions will be used to buy buildings operated by Meininger Holding GmbH, a unit of Mumbai-based Cox & Kings Ltd. Meininger plans to grow from 16 hostels to more than 40 in the next five years, Chief Executive Officer Navneet Bali said. The company is also looking at opening properties in India and the U.S.
A room for four people in the Generator Dublin in July costs 93.60 euros compared with 328 euros for a room for two at the Radisson Blu hotel less than a mile away.
Du Plessis, who now works in Dublin, said the first time he stayed in a hostel he wasn’t used to sharing the facilities.
“After a while, you kind of got addicted to it,” he said. “It was really interesting to have international conversations with people from all over.”