Hostels are well-known by backpackers and budget travelers throughout Western and Central Europe, as well as many other parts of the world, as the thrifty alternative to hotels. Moreover, the governments of many countries see fit to assist in developing this area of small business. In turn, hostels are gradually making their presence known in Russia.

As many people already know, hostels are the budget-stretching, communal option for those who wish not to break the bank for an individual hotel room. Hostels the world over offer the same, general services, and there is even an international association of hostels with 4,500 members worldwide (youth hostel association, or YHA).

The first examples of today’s hostels appeared in Germany at the beginning of last century. At the time, premises for spending the night were established throughout the country for young travelers to stay for a minimal fee, and the hostels were located at a convenient distance from one another so travelers could reach them in a matter of time.

The main difference between a hostel and a budget hotel is that a lodger in a hostel receives a bed in a common room, similar to a dormitory, although quite a few hostels today do offer separate rooms. Indeed, a group of travelers could share an entire room themselves. However, it is the atmosphere that is most important in hostel. A hotel has travelers each going about his/her own separate business, but, in a hostel, people mingle and socialize with on another, talk about the sites they saw during the day and where they are planning on going the next day. A typical scenario in a hostel could be a young woman from Canada becoming acquainted with a student from Denmark, and they are making plans the next day at breakfast to visit the Louvre together.

“Hotel reception will never inform you of who is staying in the next room,” says Yulia Zubareva, president of the Russian Association of Hostels (a member of YHA). “However, the reception in a hostel is ready to provide such information. Also, there are common areas in hostels, where travelers get together and get to know each other and often continue their journey together. Quite often, socializing in the TV room carries over to having dinner together.”

Moreover, hostels are not simply a student dormitory, as the rooms are guaranteed to be clean and there is a standard level of service. There is a common area in each hostel, a kitchen, TV, refrigerator, standard services at the reception and other features. Furthermore, should a particular hostel neglect to fulfill the set standards, said hostel risks losing its membership in YHA.

In terms of the basic standards, there are minimum requirements for ceiling height (2.5 m) and size of the beds (80 X 190 cm), and there must be at least 75 cm between the beds/cots. In the event that two beds are side by side, there must be a headboard placed between them. Each lodger receives freshly cleaned sheets and towels. Overall, the conditions are very simple, but there must be at least two hooks per person for hanging clothes, shelves or lockers for luggage and personal belongings, a mirror, an electrical outlet and a rubbish bin/trash can. Also, an individual lamp and table are recommended.

Just how many hostels there are already in operation in Russia, Zubareva could not say exactly. “We count only those hostels in our association, so there are 15 today, while several others are under review as per application,” says Zubareva.

Although there are significantly more establishments in Russia calling themselves hostels, they cannot all be considered as such. “These places could better be termed as a sort of ‘flophouse’ not adhering to YHA’s requirements,” continues Zubareva. “For example, the premises do not have an emergency exit; do not have the required number of showers or sinks per the number of lodgers, and many other shortcomings. As I have already said, a hostel must have a common area and a kitchen, and those working at reception should at least speak English.”

There have also been hostel-like establishments in Russia, such as all sorts of dormitories and even ordinary hotels, when administration would accommodate total strangers in the same room (this was mostly during the Soviet times). The Western style of budget accommodation came to Russia in the early 1990s, when Travel Guest House opened its doors here.

The Alternative: A View of the Kremlin

It should be noted that not too long ago it was not so simple to open a hostel in Russia, given the nuances of the country’s legislation having caused problems. Indeed, the hotel service industry was subject to licensing, and a concept such as a hostel did not officially exist. However, the licensing of hotel services was repealed several years ago, thus the road to hostels was opened.

One of Moscow’s popular hostels, Napoleon, is located in the Kitai Gorod district, having been opened jointly by Mikhail Nuridzhanov and Englishman Richard Lines. “My partner, who worked previously as a financial specialist for large companies in London, got the idea to open a hostel,” says Nuridzhanov. “He evaluated the market as being very prospective, as there were only a few hostels a year-and-a-half ago. Richard is an avid traveler, having been around half the world, so he understood very well what type of business this is, how it operates and, most importantly, how to make it a success.”

Napoleon’s main clientele are usually foreigners from the U.S., Britain, Australia, New Zealand, Germany and France, and, according to Nuridzhanov, during the summer, a lot of lodgers from Central Europe, such as Poland, Hungary and the Czech Republic, stay at the hostel, although they are considerably less. The average lodger at a hostel is from 18-30 years old (65% men, 35% women), but there are also other guests of all ages, who simply enjoy the company of others.

An interesting fact is that only guests younger than 35 years old may stay in multi-bed rooms in U.S. and European hostels, and this is considered worldwide practice. Guests older than 35 years old are lodged in single and double rooms. However, this is not the common practice in Russia thus far.

The potential guest at a hostel in Russia is significantly more diverse, given that spending the night in one of Moscow’s hotels today costs an arm and a leg, which not everyone can afford, given that a room could cost the equivalent of a trip to Paris or Berlin. Moreover, many foreigners are wary of staying in a rented-out apartment or flat for the night, which is a very profitable business today for tourist industry operators, although this practice is not common in any other country in the world. Indeed, foreign travelers are far more comfortable, for lack of another alternative, to stay specifically in hostels. Tom Clark, who came to Russia from London to visit some friends, calls the prices for Moscow’s hotels obscene. “There are plenty of places in Europe, where a person can spend the night for 20-30 euros. In Russia, however, the number of inexpensive hotels is limited.” Accordingly, Clark was satisfied with his stay in one of Moscow’s hostels, where he had access to all the necessities.

Small Business

As a result of the high cost of real estate, hotel industry specialists view hostels with skepticism, given that this type of business is not highly profitable. Nevertheless, the number of hostels is increasing in Russia, and there are already several chain projects. As of today, there are 12 hostels in Moscow (at least, there are 12 calling themselves “hostels”), with half of them having opened their doors in just the past year.

“The high lease rates and real estate prices affect, off course, the finances of the project,” says Nuridzhanov. “However, if there is a good balance between location, quality and service, then the project could operate well financially.”

The average cost of spending the night in a Moscow hostel is 700-850 rubles, which is less expensive than in London, but more expensive than in Germany, where the cost of spending the night in a hostel is 15-18 euros.

During the summer months, Napoleon has an 80% occupancy rate. However, during the off-season, the hostel only has an occupancy rate of 40%-50%, as is the story with other hostels.

“When we were just getting started a year-and-a-half ago, business was doing very well,” says Nuridzhanov. “At the time, there was still not any competition, and it was easier to set prices for good profits. However, the number of hostels has recently increased two-fold, so competition has become stiffer.” The further financial prospects of hostels are not clear, as the off-season will clarify the situation.

“The arrival of new players during the summer will skew the market ahead of time, given that all hostels are full during the peak tourist season. However, in the long-term, I do not see how most of them will make it through the winter,” says Nuridzhanov. “The number of tourists will decline sharply by two-three-fold, and competition will get very tough. Most likely, there will be a price war.”

By offering additional services, such as visa invitations, registration, booking tickets and ordering individual and group tourist excursion, hostels so far can increase profits. Indeed, lodgers pay separately for these services.

Naturally, hostel owners are not willing to speak about their revenue and profit margins, while the cost of renting an apartment/flat for a night is also a professional secret. However, it is possible to get an overall picture of the business’ profitability. According to YHA’s standards, one bed occupies six sqm (a bed could be a bunk occupying five cubic meters). The common area is subtracted from the useable area, such as the kitchen, reception, common room and showers and toilets. During the winter, as previously stated, hostels have a 40%-50% occupancy rate and a 90% rate during the summer. Therefore, one only need ascertain what the lease rates are for comparable premises in the said district.

“The classic hotel does not serve breakfast, thus does not spend money on providing food,” says Angela Saleh, marketing analyst at City Hotel. “Moreover, a hostel does not require special redesigning of the building, high costs for equipping a room and reinstallation of the utilities, as showers and toilets are in one common room rather than individual ones.”

As of today, the vast number of hostels is in rented premises, as this is more advantageous, given that purchasing real estate for a hostel could put an end to an investor’s plans.

“Currently, we lease property in a former communal apartment building, where we have completely refurbished the premises,” says Nuridzhanov. “However, there were several financial plans, from purchasing the premises to participating in the project of venture capitalists. Having fully analyzed the situation, we came to the conclusion that leasing was the simplest and most efficient solution.”

Most hostels in Moscow are located in leased apartments in the city center, as visitors specifically do not want to spend time traveling to the center. However, there are several hostels on the edge of town, such as Sherstone, located on one of the floors in the Vostok Hotel, near Vladykino subway station to the north of Moscow.

Whether or not to buy the premises for a hostel certainly depends on the means and goals of the investors (hostels are generally constructed as separate buildings in other countries); however, calculations demonstrate the low efficiency in this arrangement. According to the experts, real estate minimally appropriate for a hostel costs at least a million dollars. The size of the area naturally depends on a number of factors, such as location and the technical condition of the apartment, but it is naive to believe that one can purchase an entire floor for this money in an old building in the center of Moscow (hostels, as previously stated, are generally located in the city center). Given the standard of one bed per six sqm, one can figure that this type of apartment on average, excluding tax and operating expenses, will have a return on investment of around 10 years.

Moreover, the financial indicators will most likely noticeably worsen in the event the investor has taken out a loan. Moreover, mortgage rates, which are 10% on average, are comparable to lease rates. Naturally, by buying the premises, an owner eliminates a number of risks associated with the lessor; however, the financial indictors could substantially worsen.

The low mortgage rates (only 4%-5%) explain the large number of hostels in London (more than 50), where the cost of real estate is even higher than in Moscow. Investors unburdened by these expenditures may purchase premises and outfit them for hostels. Investors are appearing today to build hostels on purchased premises, too. One of these is Englishman James Skinner, the owner of the Godzilla’s hostel. The hostel, however, declined to comment for this article.

There could be even more hostels in Russia, but the low number of tourists puts downward pressure on the financial indicators. Moreover, Russian citizens seem to have passed down the tradition of staying at the apartments of their acquaintances, even distant relatives, who find guests foisted upon them unexpectedly. In terms of foreigners, Russia’s visa regulations complicate travel, plus there is not a developed system of economy flights, and both these factors bite into the wallets of potential tourists to the country. Consequently, only well-off foreigners willing to spend the time and money have bothered to visit Russia, while the majority of prospective middle class tourists and the vast majority of student backpackers cannot be bothered to deal with the visa regulations and the prices for airfare, thus they visit other countries in Europe.

Another exacerbating factor for investors is the rumors that the simplified taxation of hostels as small businesses (6% of profit) will be annulled.

No Support

“Investor expenditures on leasing real estate for hostels provide a return on investment,” says Zubareva. “The prices here vis-a-vis hotels are lower and travelers take advantage of this; however, the government could definitely provide more assistance in this sector.”

Hostels in Germany enjoy the full support of the governmental authorities who see the importance of developing this format of the hotel industry. Particularly, investors may receive land for constructing hostels for 25-30 years free of charge. The state helps the far-from-poor YHA develop, and the association then accounts for each cent spent.

The Moscow authorities are fully occupied with constructing five-star hotels, so they are unaware of the problems faced by hostels. Moreover, most of the bureaucrats do not understand what this word entails. “I spent a lot of time speaking with officials from the Moscow City government, but it was all in vain,” explains Nuridzhanov. “They did not know what a hostel was, and, while several years ago this format was part of the program for developing the hotel industry, today there is no understanding of what a hostel is, so, correspondingly, there is no support.”

However, according to Zubareva, the authorities today have begun to pay attention to hostels, but it is still unclear whether this will lead to specific action. According to Nuridzhanov, the state could assist in developing hostels by offering premises for lease at reduced rates on special terms and conditions, or the state could offer investment contracts for building hostels.

In terms of the future of hostels in Russia, the situation is still not fully clear. Some investors are not put off by stiff competition, while others are being more cautious, waiting for the end of the off-season.

Zubareva is confident for the future of hostels in Moscow and St. Petersburg, where they are being built, in her opinion, on more or less strong footing, especially in Moscow, with international flights arriving and departing. Only the regions leave room for concern, given that there are still not very many hostels in these areas.

Indeed, the regional expansion of hostels is still not very impressive. There is one hostel each in Ulan-Ude, Sochi, Yekaterinburg and Veliky Novgorod. “These are cities more or less visited by tourists,” explains Zubareva. “Alas, the situation in Russia’s other cities is far from ideal, and, even if hostels do open here, they have problems functioning for one reason or another.”

According to Nuridzhanov, the future of hostels in Russia depends mostly on the policies of the federal authorities. If they are able to agree with the European Union and individual countries on implementing visa-free travel between the countries, the number of tourists to Russia will most likely substantially increase. Consequently, the number of hostels will also grow. However, even if this does not happen, the demand for hostels in the mid-term will increase by 20%-30% all the same.

“Considering the dearth of economy class hotels in Moscow, the hostel segment will very likely continue to grow, especially following the final implementation of legislation regulating this business area,” concludes Saleh.