Europe’s a&o Hostels, founded in 2000, has become one of the region’s most impressive hospitality success stories, today offering 46 destinations, with another three under construction, across 32 cities in 10 European countries.
In 2017, the group’s growth dynamics – with 31 properties at the time – saw TPG Real Estate acquire a&o’s owned and leased assets for around €250 million. Yet by 2023, founder Oliver Winter was wondering if the firm could grow even faster. The resulting management-led buyout at the end of that year brought in sponsors Stepstone Group and Proprium Capital Partners to boost a&o’s spending power. “The idea was to provide the company with fresh capital to really accelerate growth,” Winter says.
The private investment firms paid €800 million for the business and promised, along with debt finance from Apollo, a phased war chest of around €1 billion to drive the addition of new destinations. “The first wave of investment, has already resulted in nine deals in 24 months,” he adds.
Hostels thesis
With the initial €500 million already allocated, a further €500 million is now in play for a slate of fresh deals. These are likely to comprise a combination of new development and hotel and office conversions across key European gateway cities, according to the firm.
“The capital is intended to accelerate a&o's growth strategy through a combination of organic expansion and selective M&A,” explains StepStone partner and head of EMEA real estate, Josh Cleveland.
Since the buyout, he notes that the “core investment thesis” for hostels remains intact, despite a series of geopolitical and macroeconomic pressures on hospitality.
“We continue to see significant opportunities for market consolidation, with a&o holding only a modest share of its addressable market despite being the clear European leader,” he explains. Meanwhile, although he acknowledges that broader travel demand has softened in parts of Europe this year, occupancy has remained resilient. “In a more uncertain economic environment, a&o's value positioning can benefit from consumers trading down from traditional hotels,” he suggests. “Historically, budget accommodation operators have often gained market share during downturns as travellers seek better value, before reducing travel altogether.”
Finally, the case for hostels is boosted by a&o’s diverse clientele, “including its large school groups business, which benefits from demand that is often embedded within educational curriculum, creating stable and inflation-hedged source of demand through more volatile market conditions,” he says. “We remain highly constructive on the medium and long-term outlook for the sector.”
Ownership ambitions
In a world of hospitality operators focusing on asset-light strategies, a&o stands out for its willingness to own the real estate. “If you are a listed firm, it’s really difficult to be asset heavy,” says Winter. “For us it’s easier, as we are privately-backed. Our private equity owners are real estate experts.” He adds: “We are able to buy or lease assets, depending on the opportunity, but we like bricks and mortar as that gives us more flexibility to do deals – no third-party investor is then required.” Winter remembers all too well the challenges of the pandemic, and how being hostel owners helped at the time. “We were making arrangements directly with the banks, not landlords,” he said. “That was important for our financial stability during Covid.”
One of the firm’s most notable recent deals, accordingly, has involved a gigantic piece of real estate in the heart of Berlin. Last December, a&o acquired Schulz Hotels, which currently operates as a single, 1000-bed hotel at Berlin's Ostbahnhof, with another in the planning stage in Berlin's new Heide Quarter. Schulz is positioned as a “premium, design-led budget option”, notes Winter, which fits in with a long-considered plan for a parallel track of premium hostels within a&o.
“To date, we’ve been a super-lean, budget operator,” Winter says. “But with the new sponsors stepping in, we wanted to explore faster growth routes, such as adding a more premium hostel format.” He explains that on a daily basis, he currently has to “say no to ideas about adding more premium-design elements to our hostels” but notes that developing out the Schulz brand allows them to do just that.
He adds: “a&o has always been built on a trade: five minutes further out, and a much better price. A premium offering like Schulz lets us make the opposite trade where it’s worth making - an A location in an A city like Rome, at a rate that location can support.” Meanwhile, Winter’s personal connections helped secure the Schulz deal. “I knew the owners; they founded Meininger,” he says. “I remembered they had a single-asset business and we wondered if they would be open to selling it. They were, and also wanted to retain part of the business, which is a win-win – they are helping us two days a week and still committed,” he says.
The Schulz combine will also allow a&o to open dual locations in the future, with one door leading to an a&o hostel, and an adjacent building operating as a Schulz. This transformation is already in the works in Manchester, where a&o purchased two properties in January, on Portland Street and Dickinson Street, from Ares Real Estate funds and EQ Group. Hitherto operating as Accor brands ibis and Novotel, they will eventually become an a&o and a Schulz. Winter says that the multi-brand approach of players like Accor inspired the strategy of combining two brands in a single location.
“We’d like to grow Schulz to represent 20-25 percent of the whole portfolio,” he says. “It represents 4 percent at the moment.” The massive Berlin Checkpoint Charlie site that a&o acquired has also been earmarked for a double-brand play. The more premium flag will furthermore be useful for cities like Dublin, or further expansion in London, locations which are currently seen as “expensive” for classic a&o operations. “Our aim is to operate 5,000 beds in London, but we could even do 10,000,” he says.
Navigating the markets
While the business flirts with more premium positioning, Winter is still choosing a back-to-basics approach. “The challenge is to maintain the margin. Margins are under pressure everywhere, even in hostels. We are happy if we can keep occupancy stable and even grow a bit,” he adds. The ongoing crisis in Iran has impacted travel costs, with Winter concerned about “rising gas prices and the impact on both airline tickets and car journeys”. Looking on the bright side, “consumers are booking a bit more in advance again, compared to earlier in the year, although there is a shift towards flexible rates”, he says.
The business will continue to prioritise sustainability, which he sees as a real selling point for consumers, while a lot of real estate growth will continue to come from adaptive reuse. “We are finding family hotels in need of capex and older properties with now unused convention space, where we can add more beds,” he says. Office conversions, like the Checkpoint Charlie acquisition, is another “big growth opportunity”, he adds, one that will allow a&o to pursue further hostel development as the real estate usage landscape continues to evolve.