With its promise of high design at low prices, Mueller's fast-growing Motel One chain has joined citizenM and B&B Hotels as part of a new breed of hotels leading the charge on established budget brands such as Travelodge, Whitbread's Premier Inn (WTB.L) and Accor's Formule 1 (ACCP.PA).

Mueller, Motel One's chief executive and founder, aims to bring the brand's turquoise and cream stylings to the UK, Austria and Belgium. "There's not a German hotel chain with an international presence," he said. "We want to change that."

The city centre locations and funky decor of the new chains are proving popular with tourists and business travellers alike as they rein in budgets in debt-hit Europe. Motel One says that 60 percent to 65 percent of its guests are on business trips.

In Germany, large companies have cut spending on business travel by about 12 percent since 2007, even though the average amount of travelling has remained unchanged, the VDR travel association said.

"Budget hotels are making a bid for the cost-conscious but style-seeking consumer and are remodelling their rooms and atmosphere to compete with the look that the boutique hotels made famous," said Euromonitor travel and tourism analyst Nadejda Popova.

Sales figures for budget hotels rose 10 percent in 2011, representing a 41 percent share of the $162.5 billion European hotel industry, Popova said.

'AFFORDABLE LUXURY'

Ursula Kriegl, of the hotel investment services company Jones Lang LaSalle Hotels, said: "The budget segment has changed dramatically. More chains have expanded and contributed to a more diverse, more professional offer."

Citizen M, the motto of which is "affordable luxury for the people", offers rooms in London from about 99 pounds, while Motel One rooms in Germany generally start at 50 to 60 euros a night.

Marc Socker, senior director of hotel fund management at Invesco Real Estate, says that this is an opportune time to be investing in the hotel sector. "Supply is very low - there are very few hotels being built in Europe - but demand is high, with occupancy near historic highs, and global tourism is continuing to grow," he told Reuters.

The IPD Pan-European Hotel report published this month said that the budget hotel sector provided a 9.8 per cent return on investment in 2011, beating the 6 percent for European hotels overall.

The pressure from the new chains means that the established players are having to sharpen up their act and give their hotels a more contemporary feel.

"You have to ask these days 'what is budget'? If you can pay an extra 10 pounds and get a more design-style hotel, then you will," Invesco's Socker said. "I'm wary for players like Premier Inn and Travelodge because, with the sort of product they have, there are few barriers to entry."

Accor's Ibis, Europe's largest economy hotel chain and the fourth biggest worldwide, saw second-quarter sales growth slow, dragged down by its budget hotels business. .

REBRANDING AND EXPANDING

It is currently renovating its budget hotels, rebranding the Etap/Formule 1 and All Seasons properties as Ibis Budget and Ibis Styles, with a focus on unique design features and new beds, mattresses and pillows.

Holiday Inn, which terms itself mid-range and is part of the world's biggest hotelier InterContinental (IHG.L), recently finished A $1 billion refurbishment.

It has 492 hotels in Europe, with a further 62 Holiday Inn and Holiday Inn Express hotels in the pipeline in Europe. In the first quarter, comparable revenue per available room for its Holiday Inn Express hotels, the more basic brand, grew 9 percent, outstripping the group average of 7.6 percent.

Motel One will begin its assault on the UK at the end of this year with a hotel in Edinburgh. Further hotels are planned for London, Manchester and Newcastle, along with Brussels, Vienna and more in Germany.

The Munich-based group achieved a 70 percent jump in revenue in 2011, to 134.8 million euros, with pretax profit up 25 percent at 23.4 million euros. It operates 39 hotels with more than 8,500 rooms and aims to have 60 hotels with 13,500 rooms by 2014.

The established UK budget chains, such as Travelodge and Premier Inn, have ambitious expansion plans of their own.

Travelodge, which has more than 500 hotels, opened four in London alone in July and plans nine more by the end of 2013. It says there is a lack of budget rooms in London and is seeking a further 50 sites across the capital as it looks to increase its overall estate to 1,100 hotels with 100,000 rooms by 2025.

Premier Inn, the UK's largest chain with 620 hotels, aims to have 65,000 rooms by 2016.

Invesco's Socker expects the branded budget sector to achieve more growth in continental Europe than in the UK. "The UK is one of the most brand-penetrated markets in Europe, whereas Germany, Spain, Italy and the Netherlands have few branded hotels," he said.

(Editing by David Goodman)

• A Permanent Economic Emergency