Hostel, pod industry calls for investors
A unique opportunity in the Gold Coast’s hospitality market has surfaced for investors, with a new report highlighting a chronic undersupply of hostels in the tourist hotspot.
The new research from M3 Property showed that demand for hostel accommodation has outstripped the 12 in operation across the Gold Coast region, with only two new hostels currently in the pipeline.
James Ruben, national director of specialised assets at M3 Property, said that the lack of budget options for the traveller market presents a unique investment opportunity.
“Given that there is more demand than there are backpacker hostels available, especially on the Gold Coast, it is worth noting that there are relatively low barriers to enter the backpacker hostel sector, with no real legal barriers and relatively low start-up costs,” Ruben said.
“Higher real estate prices have made this more difficult in the past decade, but the potential capital gains from property increasing in value in future years helps to offset this cost,” he said.
Only one hostel has been sold since January 2022 at a price point of $1,125,000 excluding GST.
While the rooms are typically dorm-style with multiple bunk beds, some newer hostels market themselves differently with “capsule” or “pod” type accommodation – with rooms having multiple capsules or pods that contain a bed, power points, individual lights and USB ports.
Backpacking hostels are part of the caravan, parks, holiday houses and other accommodation sector which generated $306.7 million of nationwide revenue for the 2024 financial year.
In the Gold Coast, the tourism market generated some $7.8 billion in visitor expenditure from approximately 12.2 million visitors during 2023 – a number that is expected to grow as travellers come back to Australia.
Tourism Research Australia showed that there were 59,992 backpackers to Surfers Paradise in the 12 months to March 2024, out of which 29,082 travellers held Working Holiday Maker visa.
This working holiday maker market has become an important market for the hostel sector.
The initial cost of setting up a backpacking hostel comes from purchasing or leasing property and furnishing it to the legal standard.
In addition, the lack of budget options hasn’t determined backpackers to choose hostels as travelling accommodation despite the rising price of beds per night.
On average, a single night in a bunk room goes for $61 – ranging from $49 to $104, depending on the hostel location.
In Australia, the hostel sector is dominated by YHA, being the largest backpacker hostel provider that operates 38 backpacker hostels across the country – and only one hostel on the Gold Coast.
YHA Australia has, since the end of 2020, sold five hostels across Australia that have transacted for a total of $33.1 million.
The other backpacker hostels are mostly operated by small-scale operators.
While entering the hostel sector can be a good investment opportunity, some challenges remain, including getting development permits from local governments as several applications have failed due to objections from neighbouring owners around noise, security and parking issues.
Another challenge that hostel investors can face is the popularity of accommodation-share providers such as Airbnb, which have increased their supply over the past decade and have reduced profitability for operators.
To counteract vacant properties and reduce the rental shortage in the Gold Coast, the local government has asked Airbnb providers to be registered and have appropriate zoning.