Developing assets to serve alternative travel requirements

Beyond resorts, alternative assets are attracting travellers seeking different experiences, and investors looking for new returns. What are the opportunities in segments such as serviced apartments and hostels?

Real estate business Hines, for starters, has been expanding its student housing platform. Seeing a gap in the market in Milan and a need for affordable accommodation, the group turns its student housing into hostels during the summer when the properties are unoccupied.

“After Covid, what we’re seeing in Italy is that all the traditional hotels have gone crazy in pricing and people can’t afford it,” explains Hines’ director – living, Stefano Pagliani.

“You’ve all heard of ‘glamping’, glamorous camping – what we’re trying to do is ‘glostel’, glamorous hostel.”

A more resilient market?

Real estate and hospitality investment vehicle Tabah Capital Holdings also entered the co-living and purpose-built student accommodation (PBSA) market in 2020 due to concerns around the hotel market at the time. Chief executive Alexis Delprat says the market is “in its infancy” in Portugal and a “relatively safe investment”, tapping into an increasing student population, particularly international students, and young professionals on assignment looking for something less expensive than a hotel, and communities of like-minded people.

Through its upcoming venture capital fund, COVIVIR FCR, Tabah will look to raise €100 million to invest in the development and management of student accommodation/co-living and future living operations in Portugal (60%) and neighbouring EU locations (40 per cent).

“Compared to the hotel industry, even midscale, we saw that this is a more resilient market. There’s a wave of students, Gen Z and millennials, coming every year,” says Delprat.

Independente Hotels & Hostels, meanwhile, is looking to make its venues the hubs of their cities. The group opened the 67-key four-star Independente Comporta in Grândola earlier this year.

“Look at hospitality from back in the days when hotels were really the hubs of social living of each city. It’s where you’d go for weddings, baptisms, getting together with people, private dinners and so on. That in Lisbon had been lost in the 1980s and 90s. The hotels fell asleep a little bit, above all on their F&B and ancillary offerings, and then in came the private sector, the restaurant sector, bringing new ideas... and we lost that,” explains founder and managing partner Bernardo D'Eça Leal.

However, the hostels have not just been designed for young people, he says – Independente is mixing different demographics by offering both hostel and suite accommodation.

“The suites give us the ADR, the high revpar, the spending in the restaurant, and the hostel gives us the numbers, the spending on drinking and the dinner offer, and give us all this cool ambience,” he says.

Although, financing is a challenge for the segment. Financing is “tough everywhere,” says Pagliani, “sometimes it’s just easier to do full equity because you just cannot afford your debt, because your debt is 6%-7% if you’re lucky”.

Delprat says this allowed Tabah to discover “a whole new arena” of lenders. “We see the interest rates for PBSA and co-living, because it’s a long cashflow, it’s around 5.5%-6% which, if you buy well and secure your investment and control your construction costs, you can deliver,” he says.

Meanwhile the yield can depend on the sub-sector. Student housing, on the one hand, is perceived as less risky, but is seeing lower yields, while Hines is seeing larger yields in hotels and hostels. But ultimately, says Pagliani, the overall appetite for the living sector is “huge”.

Finding value in a brand

As a result, D'Eça Leal believes it’s only a matter of time before the big brands get into the alternative accommodation space in a serious way –  Accor, Hilton and Marriott are already making inroads into residences and hostels.

Although, Delprat suggests that big brands are not the be all and end all when it comes to attracting students – he argues they’re more likely to look at what is local to their institution.

“I don’t think for that generation – millennial and Gen Z – the actual brand matters at all. What matters is amenities, community, the lodging, the cost and the location,” he says.

“From that perspective, we would think twice about branding. Management and operations for sure we wouldn’t do that, that needs to be done by professionals... If we get to where we want to go – about 3,000 keys and 10 buildings – and in order maybe to flip it at the end to an institutional investor, a brand would probably be a security for the investor. But I consider some of the PBSA and co-living brands today, whether the CRMs or the collegiates or others, to be credible brands for the investors, and it’s been shown through transactions across Europe. Last year in particular was quite a good year.”

According to Knight Frank, student housing was the only real estate asset class where investment volumes were up in both Q4 2022 and full-year 2022, with a record £13.1 billion deployed across approximately 270 transactions.

Says D'Eça Leal: “If you’re able to develop a differentiating factor around your brand, you can really gain a position where you can exit at a very interesting return.”

All those quoted in the article appeared on stage at the Resort & Residential (R&R) Hospitality Forum held in Lisbon between October 9 and 11, in a session called: Adjacent Leisure Spaces: Developing Assets to Serve Alternative Travel Requirements.