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Developer Oxford Holdings has consent to build a five-level, 256-person Jucy Snooze backpackers will be built on the corner of Camp and Memorial Sts.
The original plan, as reported in March, was to add two floors to a three-level building.
But Ian Hamilton, a director of Oxford Holdings, now says: ''We're demolishing more than we originally intended to.''
The building will be taken down to the ground floor and some walls will be retained, so the new building can be earthquake-strengthened to 100% of the building code.
Mr Hamilton expects work to start by Christmas and for the building to be open in late 2017.
He said demolition was slightly more economical than strengthening the structure.
The Queenstown hostel would comprise bunk-style accommodation for 172 backpackers and self-contained units for another 84.
Bunk room guests would sleep in 2m-long pods.
They are designed for one person, but Jucy Snooze general manager Chris Myers said: ''We're going to have a look at the option of two-people ones in Queenstown.''
There would be a rooftop bar and restaurant, and guests would be able to use their smartphones for checking in, opening and securing their rooms.
The operation would fill a gap in the market, Mr Myers said.
''Queenstown's got a shortage of beds in most seasons now.
''We're really confident it will fill up pretty quickly.''
Jucy Group, best known for its rental campervan business, will open its first Jucy Snooze budget hotel in Christchurch next month.
-By Philip Chandler