Profit margins a lure for backpacker hostel buyers

Melbourne investors bought the Westend Hotel earlier this year

Their rates might be from the bargain bin, but a new report says backpackers accommodation and hostels could be the smartest money investors ever spend.

The latest Savills Hotels Market Update says alternative assets like backpacker hostels and boarding houses are among the hottest topics in investment circles.

Almost 47 million nights were spent in Australian backpacker style accommodation last year – as much as 10% of all overnight visits, including 6% of international visitor nights spent in Australia.

Savills’ assistant valuer hotels NSW, Iris Liu, says the lower costs of operating a hostel made them a compelling option for investors looking to buy and then lease a property to an accommodation operator.

This higher return margin, and generally lower price point, is attractive for investors seeking a yield-driven return

“Most backpacker properties are located at beachside or tourist destinations and provide limited ancillary services, resulting in lower staffing levels,” she says.

“In addition, lower levels of fitout and maintenance costs also contribute to higher profit margins for this asset class in comparison to four or five-star hotels.”

The Surf 'N' Sun Backpackers sold in August for $5.5 million

The Surf ‘N’ Sun Backpackers sold in August for $5.5 million

“This higher return margin, and generally lower price point, is attractive for investors seeking a yield-driven return.”

Buildings operating as hostels are also attracting considerable interest from investors and developers seeking to capitalise on the demand for hotel accommodation.

In May, Sydney’s Westend Hotel was sold to a Melbourne group for $19 million after CBRE agents Andrew Jackson and Rob Cross fielded a staggering 300 inquiries and showed 45 potential buyers through the property.

The Pitt St property had been operating as a 359-bed backpacker hotel, but is being refurbished and upgraded to a budget hotel.

Also among the recent sales was the 96-bed Surf ‘N’ Sun Backpackers in Surfers Paradise, which sold last month along with four neighbouring short stay motel apartments for $5.5 million.

Jackson says he expects investor demand for hostels to continue.

“We expect this interest to continue as there is a lack of quality hotel stock available and buyers look to less traditional assets generating strong cash flows,” he says.

“This strong trading outlook is drawing huge interest from both domestic and offshore buyers, with Asian buyers having been particularly active in the first quarter of this year. This is driving the strong pricing being achieved for hotel assets in strong centres such as Sydney.”