The tourism market in Australia, and in particular the backpacker and hostel industry, was one of the most impacted sectors during the COVID-19 pandemic. This culminated in a drastic 99% reduction in backpacker entrants as borders slammed shut in early 2020, and the future of the travel and tourism industry faced significant uncertainty.
The COVID impact in numbers
Traditionally, 250,000 jobs are filled from holidaymaker arrivals and generate approximately $3.2 billion for the Australian economy per annum.
With international borders closed, many backpacker owners and operators saw their typical guest segments of working holidaymakers visa-holders and international students dwindle, leaving many businesses to rely on domestic backpackers and internationals that remained in Australia over this time.
Persistent state border closures in 2021 put even further occupancy pressure on many of these operators.
Traditionally Australia allows citizens of 44 countries to apply for working holidaymaker (WHM) visas, typically with over 300,000 WHM visa holders entering the country each year. March 2021 saw a mere 160 arrivals land in Australia on these visas and this combined with new international students halving, meant the guest pool for backpacker operators across the country had largely diminished.
The rise of the flashpackers
This motivated many owners and operators of youth hostels, student accommodation and co-living properties to look at innovative solutions to ensure their properties remained economically viable. This was highlighted by Youth Hostel Association (YHA) Australia’s recent reinvestment into their brand, partnering with Atlassian to restore its heritage-listed backpacker hostel at Sydney’s Central Station. The development will see a revolution in the backpacker space, focusing on the digital nomad who will be drawn to the local dynamic tech hub.
This redevelopment reflects the evolution of backpackers to flashpackers. These flashpackers or digital nomads are backpackers with a better budget, seeking out a solid internet connection and common areas with F&B facilities. Flashpackers effectively bridge the gap between budget travel accommodation and 5-star hotels.
The recent rise of working from home has meant that people can work from anywhere, and many have moved employers to take advantage of this freedom and flexibility as digital nomads. With this, we expect this trend to only grow more popular into the future and become a mainstream accommodation offering.
How are owners and occupiers responding?
Over the past two years, we have seen many owners and operators adapt and change their offering from focussing on the traditional backpacker segment. A great example of this is the new Bounce Noosa, a hybrid resort that offers both backpacker style and upscale rooms in a modern style and setting, tapping into the non-traditional domestic backpacker market.
Some hostels have pivoted during this period, with the accommodations being used for alternate uses, including farm-worker accommodation, as well as government-backed crisis accommodation and for residential use, given the tightening in the rental market.
Not all major groups were able to go through these challenging conditions unscathed, with the Tourism Adventure Group (TAG) one of Australia and New Zealand’s largest hostel groups, placed into voluntary administration in July 2021. The group, which was highly profitable in the pre-pandemic era reporting a $150 million turnover in 2019, were forced to go through Administration, which saw a restructuring of their 25-venue portfolio and several assets rebranded out of the group.
The start of the recovery and the future outlook
Market sentiment for the Australian backpacker industry started to shift at the end of 2021, after the Federal Government’s announcement of the imminent reopening of the international border. The 21st of February 2022 marked the removal of the final major barrier for vaccinated international visitors into the country and raised the call for backpackers to return to Australian shores once more.
Since the government’s easing of border restrictions beginning in late 2021, 80,000 international students have arrived in the country with a substantial 13,500 people arriving in the past week alone. In line with this, 1000 working holidaymaker visa holders and backpackers have landed in the past week and over 35,000 WHM visas have been approved since November.
Accommodating pent-up backpacker demand
In a bid to alleviate labour shortages and reduce disruption to the supply chain, the Federal Government is actively encouraging backpackers and international students back into the country through financial incentives. These incentives include waiving working holidaymaker visa fees for 12 weeks and international student visas for eight weeks from the 19th of January 2022.
In a recent marketing email sent by YHA, in which the group generally only sees a click-through rate of 1%-2%, sent to more than 100,000 backpacker recipients with the tagline of ‘Have you been dreaming of Australia’, more than 30,000 people (30%) had opened the email in a matter of hours, demonstrating the significant pent-up backpacker demand eager to enter Australia.
Despite the challenges faced by the industry, demand for high-quality hostel assets has remained strong. Since the end of 2020, six YHA assets have been sold totalling more than $40,000,000. These sales highlight investors can see through the challenging market conditions and are taking a medium to long term view recognising the countercyclical potential in the backpacker and hostel industry and will see significant gains as borders reopen and backpackers start to pour back into the country, filling beds and rooms.
The past year has also seen several major groups enter the market.
- Drifter Hospitality Group, backed by investment bank Barrenjoey, has partnered with Intrepid Travel, the world’s largest small-group adventure travel company, amid global expansion plans to offer hostel accommodation across Australia and New Zealand with the aim of achieving a portfolio value of $500 million over time.
- Event Hospitality, known for its Rydges, QT, and Atura hotel brands has also entered the hostel accommodation industry after completing its takeover of New Zealand group Jucy Snooze. The group is recognised for its unique capsule-style sleeping pods. The brand under its new ownership structure has plans for a rapid expansion into the Australian hostel accommodation market.
- Another major entrant is the international hostel giant Selina, who made their Australian market entry in 2021 with the Selina Melbourne, a 181-bed hostel comprising a library, cinema room, dining and kitchen area, basement bar, and coworking space. The new asset highlights the evolution these groups are making in hostel accommodation offerings and how operators have adapted their assets in recent times. Selina is also expanding into Queensland, in the former Base Uptown Brisbane, which formed part of the TAG Group restructuring.