Only 8% of current hostels are part of chains, growth opportunity is massive

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Published in Sector Ejecutivo on May 2018

A hostel is a hotel for young people. The main difference is that their clients are looking for experiences and love to share and to socialise. In traditional hotels, 90% of the conversations between guests take place in the lift when one asks another what floor they are going to. At a hostel everything happens in the common areas. Rooms are shared. Guests can sleep in bed bunks in rooms for four, six, eight or ten people. Obviously, double rooms are also available for those who wish to have more privacy but the idea is that rooms lead to common areas where “everything happens”. Customers want to be at the meeting point where endless activities are organised. “We analysed the hostel business model in depth and we detected that it generated a very superior EBITDA if compared with other areas of the tourism market. As a result, we understood that we could take advantage of this higher profitability when investing in real estate by implementing a low-cost anti-crisis model. Statistics curiously show that a hostel user travels 50% more of the time and spends 25% more than a traditional traveller on a yearly basis. It is a growing sector year after year” explains Andrés Sánchez Lozano, CEO of Excem Real Estate.

When did Excem Real Estate start its real estate activity and what kind of assets did the company handle in the beginning?

We started working on what our strategic plan should be back in 2014 and Excem Real Estate was founded in 2015. We spent a whole year analysing how the market had evolved until 2007, when the real estate industry got to a peak, and what had happened throughout the crisis. This study made us decide to opt for an investment strategy aiming at three different sectors with a common ground: the final customer, i.e. young people or millennials. These three sectors refer to residential and tourist properties as well as offices. However, the kind of assets we invest in and the reason why we invest in them is not the key point here. Business models allowing income stability and asset appreciation in low competition settings are just as important, especially when the offer does not meet the existing demand. As an example, Spain has 1,500,000 students and 300,000 of them are looking for a room. Nevertheless, only 95,000 beds are currently available at existing student dorms.

What are the objectives of the strategic plan the company has adopted?

Excem Real Estate’s plan is rather ambitious but, naturally, it is a five-year plan and different objectives have been set for each one of the years along the way. The plan was launched in late 2016 and each and every one of the projects has been successfully implemented ever since. At Excem Capital Partners Sociedad de Inversión Residencial, “SIR” -which specialises in buying residential blocks for student accommodation-, all our objectives have been met. Furthermore, we will be listed in the MAB by May/June, a fact that translates into great revaluation for our investors. At Excem Capital Partners Sociedad de Inversión Turística, “SITUR”, launched in July 2017, we have invested in three hostels and have become the leading Spanish chain by number of beds. Regarding the office sector, we have just closed the first two deals but they have not been made public yet. They are to position us as the point of reference in the field of coworking. Over 55 investors have already relied on our investment strategy based on great and unique business models and have consequently invested more than €100M.

When did Excem Grupo see the great opportunity in the world of hostels and why did they decide to go for it?

We had been analysing the tourism sector since 2013, its segments, growth, type of customers and potential. This study allowed us to identify what the three kinds of travellers are: families, executives and young people. The latter are the ones who spend and travel the most. 2015 saw 270M travelling youngsters and figures are expected to reach 320M by 2020. These astonishing numbers rely on only 18,000 hostels spread worldwide and only 8% of them are professional companies. We discovered that the largest company had 22,000 beds and the tenth largest one, about 1,500 – insignificant figures for a 270M travel volume.

The tourist REIT, SITUR, has purchased several buildings that are already functioning as hostels or that ought to be remodelled. Where are they located and how will these works be done? 

The REIT was launched in July 2017 and three different buildings were bought in a time span of six months. The first one to be purchased was the one located in Calle Postigo San Martín, a very well-located property next to Plaza de Callao and opposite the Convent of Las Descalzas. This 4,000-sqm establishment will have around 400 beds and large common areas, including a bar, a restaurant, a cave, a pub, pool tables, a cinema room and something unique: the oldest liquor store in Madrid with over 100 years of history. The other two buildings we have acquired are also in the city centre, in Calle Cabeza and Calle Cañizares. These two were the oldest hostels in Madrid, opened fifteen years ago. They both belong to the prestigious European Famous Hostels association. The hostel located in Calle Cañizares, just off Atocha, was the first hostel to get the world’s best hostel and party hostel prize.

What sort of assets, sizes, locations, characteristics, etc. is Excem interested in within this line of business?

We want to buy between 12 and 15 buildings in the centre of the most tourist cities in Spain at an early stage but we would also like to spread to strategic European cities from a tourist and real-estate perspective. We are looking for already operating hostels or buildings for the different hostel brands that we have.

Towards whom is your business model oriented?

Our business model is oriented to all those investors who want to take part in a stable investment project. Tourism is the world’s second economic engine and professional hostels only cover 8% of the current 270M annual volume. Moreover, it benefits from higher EBITDAS than any other tourist business. This allows us to create two types of investment opportunities. On the one hand, investment in real estate assets for rent at our hostel chains, benefiting from a 7% net profit. On the other hand, investing in the hostel company itself.

How are you going to implement your expansion plan? What is the current level of investment in Spain and what are the stages you have thought of for the forthcoming years?

Excem SITUR is going to invest more than €270M in purchasing the best properties in order to open hostels all over Europe. Our expansion plan starts in Spain, continues in Europe and then, America. We have started implementing it in Madrid because it is the place where the real estate value would go up quicker; that is the reason why we made a quick move before the prices went up. We already have three hostels with a total of 780 beds and have invested €35M at this stage. We have set eyes on more than 50 properties in cities like Seville, Malaga, Granada, Cordoba, Valencia, Barcelona, Santiago de Compostela, Porto, Lisbon, Prague, Rome, Venice and Athens. Our plan is to have at least 2,000 more beds available by the end of the year and we are now in the middle of very strategic negotiations.

Do you intend to manage or own hostels outside Spain?

Excem SITUR is a means for all those investors who want to take part in the purchase of a great portfolio of properties located in the historic centre of the most tourist cities. This translates into an important safe investment should another crisis occur and its differential value is that income will be generated by an operative hostel company. Not only has this low-cost business model proved really well during critical times but it has also offered outstanding EBITDA. We could say it is an anti-crisis business model.

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