10 reasons to invest in Israel's hospitality market

The Tel Aviv Promenade runs along the Mediterranean seashore in Tel Aviv. Photo credit: Danor_a//Getty Images

I. Introduction to Israel

Israel is one of the oldest countries and civilizations in the world, dating back 3,500 years. Beyond the country’s cultural and religious importance is a traveler’s paradise with access to cosmopolitan cities, beachside resort towns and more.  

Key destinations include the holy cities of Jerusalem and the nearby town of Bethlehem, the Sea of Galilee, Tiberias and Nazareth; Acre and Haifa; Tel Aviv and Jaffa; The Dead Sea and the Judean Desert; and Eilat on the shores of the Red Sea.     

Diversity is, in essence, what Israel is: a one-of-a-kind combination of ancient and ultra-modern, of holy and secular—a melting pot of cultures, food, wines, music, languages and religions. All of this in a space roughly 8,000 square miles in size.

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And still a lack of accommodations. For all of Israel’s allure, it has a dearth of quality hotel rooms, a detail that should perk up hotel investors seeking a smart destination to invest in. In 2000, Israel had roughly 47,000 hotel rooms, while the number of visitors to the country was around 2 million. Seventeen years later, the number of hotel rooms was 55,000 and the number of visitors jumped to 3.6 million. The math doesn’t lie: Where do all these visitors stay? 

Israel is experiencing a surge of tourist arrivals and the country, especially Tel Aviv, is short of hotel rooms. As local reports have noted, Israeli officials have been forced to take some rather drastic measures, including a proposal by Transportation Minister Yisrael Katz to adapt an air force base for civilian use.

Other, less radical approaches include a program, touted by the Tourism Ministry, to convert Tel Aviv office buildings into hotels with proposed subsidies for hotel developers.

Priority is also being accorded to overseas hotel chains because they have their own marketing divisions and can attract more tourists to Israel. The reported aim of the program is to add more select-service hotel offerings that are normally priced lower than full-service, upscale and luxury hotels. The ministry also reportedly is offering subsidies for international hoteliers and brands. 

II. Travel to Israel

Travel to Israel has changed during the last decade. Safety and security continue to be a focus for prospective travelers, since there is a perception that Israel is a hornets’ nest of terrorism. Many nations consider Israel an overall safe place for travel, but travel advisories are issued for their citizens that generally deem the nation as containing some risk.

According to the World Economic Forum, and as of 2017, Israel ranked 103rd out of 136 countries in a measure of safety and security. Still, even with the perception and geography, the country takes pains to keep its population safe. Israel is extremely security conscious; its airport is heavily guarded and there is a constant security presence. Israel also has an Iron Dome missile defense system designed to intercept and destroy short-range rockets and artillery shells.

Another key factor is the Open Skies agreement with the EU that allows any EU registered airline to fly in and out of Israel with no restrictions other than having landing slots at Ben Gurion airport. In 2018, Ben Gurion International Airport is expected to service 21.5 million passengers. 

As a result of this major reform, all major European low-cost carriers fly to Tel Aviv. The key attraction for these airlines is not necessarily the foreign visitors, but more the Israeli tourists. In 2017, 4.6 million Israelis traveled abroad out of a total population of 8.8 million.   

This Open Skies reform that was implemented in the EU is bound to extend to the far east. In March, Air India started a new route connecting New Delhi with Tel Aviv flying over Saudi Arabian airspace. This major change in Saudi policies is bound to bring more Asian airlines to fly to Israel. The demand is there and is growing. Five additional Asian airlines have reportedly asked for flight rights to Tel Aviv via the short route over the Kingdom of Saudi Arabia.  

III. 10 Reasons to Invest in Israel

1. Destination 
Israel is a small country, about the size of New Jersey, but what it lacks in land it makes up for in culture, history, nightlife and other leisure pursuits.

Israel offers a spiritual experience for the three monotheistic religions: Christianity, Islam and Judaism. For Muslims, the third-holiest holiest site in the world is in Jerusalem's Temple Mount, the Al-Aqsa Mosque. 

Israel's Mediterranean coast runs for 170 miles, with an array of beaches, from the hip and lively shores of Tel Aviv to quieter stretches outside the city.

The country also boasts around 300 days of sunshine a year, with warm summers and tepid winters.

2. Supply
The new supply of hotel rooms is limited and does not answer the growing demand that is generated in part to liberal aviation reform in the form of Open Skies agreements with the EU, U.S. and soon with a number of Asian nations.

3. Land 
The limited real-estate space within in-demand areas, such as Tel Aviv and Jerusalem, guarantees a relatively speedy appreciation of real-estate values. The big upside is on the real estate with profits from the operations a bonus.

4. Subsidies and Grants

•    Israel gives grants for new hotel developments in key tourism destinations: Jerusalem, around the Sea of Galilee, the Dead Sea and Eilat. In those preferred high-priority zones, the grants could go up to as high as 24 percent of the cost of development. 
•    Additional construction percentages: New hotels that are built on a site that has exclusive zoning just for hotels could add up to 20 percent additional building rights for residential uses. This is a way for the developers to finance the hotel project by selling the residential parts but without cutting the size of the planned hotel.
•    Easier, faster conversions: New legislation that is part of the planning and construction law (passed on December 2017) allows local zoning committees to approve conversion of buildings with designated usage for office, commercial to be easily converted into hotels.
•    Additional grants for budget hotels: Budget hotels built in in-demand areas, in accordance to the official demand areas map, will be entitled to an additional 13 percent in grants to the already existing 20-percent grants these developers receive. This will bring the total grant to 33 percent of the total development investment of budget hotels. (The demand area zones exclude Tel Aviv and the central coast region, but include Jerusalem, Eilat and the Dead Sea.)

5. Taxes
Approved enterprise status for investments that entitles the business for tax breaks for a period of up to 10 years. The developer chooses between the grants or the tax benefits—there is no double-dipping.

6. Conversions
The Ministry of Tourism, together with the Tel Aviv Municipality, announced they would initiate a program that would guarantee 10-percent grants to developers that would convert offices in the Tel Aviv municipal zone into select-service hotels. That’s a golden opportunity since currently the plans in Tel Aviv are for an additional 2-million-square meters of office buildings and the market could soon reach a saturation point.

7. Open Business
The business environment in Israel is very open and liberal. Many multinational companies have made billions in dollars of investments mainly in production and R&D facilities. Intel, Apple, Microsoft, IBM, Amazon and Samsung are only a few of the names. The bankers and the business community are used to and are well-versed in doing business with international investors.

8. Brands
For the past two decades, the market has been dominated by local hotel brands including Fattal, Isrotel, Dan Hotels, Rimonim Hotels, Atals Hotels, Prima Hotels and Orchid Hotels. There are myriad reasons for this, but mainly because for most hotels, 60 percent of their business came from the local Israeli market. Now the market is changing. More Israelis travel abroad and more tourists are taking the place of the Israelis in the hotels. The value of international brands for developers is growing.

9. Lending
Following the hugely successful public offering of Fattal Hotels several months ago at the Tel Aviv Stock Exchange, banks have been actively looking to finance hotel projects.

10. Value
Up to 2014-2015, and for a long period of 15 years, Israelis accounted for about 60 percent of overall hotel occupancy. In resorts and spa destinations, such as Eilat and the Dead Sea, the Israeli market accounted for 80 percent to 90 percent of the overall hotel stays. They are looking for the right deal. Be it half-board, full-board or the ever-popular all-inclusive, Israelis want to get “more bang for the buck.”

Want to learn more about Israeli hospitality opportunities and network with those in the know? The Israel Hotel Investment Summit (IHIS) is a 1.5-day conference providing in-depth analysis of foreign investment opportunity into the Israel hospitality sector. The conference is Nov. 19-20 at the Hilton Tel Aviv. Click HERE to learn more and to register.

IV. How to Invest in Israel

Getting deals done in Israel isn’t always a walk in the park. Dealing with the Israeli mentality might be difficult to some foreign hotel executives. In a small country where the big business community is made up of around a few hundred people, it’s good to have a strong local representative, someone who knows the business community and knows how to get first to the deals.   

First, and like in most any business endeavor, find a good lawyer and a good lawyer that is also a good real estate deal-maker.

Beyond a proficient attorney, take these steps to ensure a smooth process.

1. Engage with a local hotel consultant that knows the ins and outs and the relevant players involved;
2. Perform a market feasibility study done by a reputable internationally recognized consultant; 
3. Choosing the right partners is always smart, especially in the hotel business, which oftentimes is long-term, not a quick-exit business. It’s a very small business environment and you can’t afford to make mistakes;  
4. Be flexible: The Israel hotel business market is dominated by partnerships between operators and owners. Leases and management agreements with minimum GOP guarantees are a minimum requirement. If you are looking for a straight forward 3 percent +10 percent management agreement, look elsewhere.  
5. Bring an international hotel brand on-board. The Israeli Ministry of Tourism fully understands the benefits and advantages of having international hotel brands in Israel; be it via a joint venture, management agreement or franchise. 

V. Threats

While traditional hotels have not stepped in as heavy as they could, Airbnb has, and has taken advantage of the shortage in hotel accommodations. In the region of Tel Aviv and surrounding areas, there are more than 10,000 listed accommodations and 3,000 active listings. 

There have been no real limitations or regulatory hurdles on Airbnb hosts, so far, other than to pay their taxes as required by the law. The simple reason being: Airbnb offers a short-term practical solution to the severe shortage in hotel accommodations in major demand areas. 

Beyond Airbnb, another option available to many visitors are residences that are owned by foreign nationals. In Jerusalem alone, there are more than 27,000 empty apartments and houses, which are nicknamed “ghost residences” and owned by foreign nationals.

VI. Conclusion

The bottom line is this: If you’re planning on entering the Israeli hotel market, think strategically, plan for the long-term and be willing to adjust to the ups and downs. 

Sometimes it will feel like a roller-coaster ride mainly due to the geopolitical situation, but if you are willing to accept these terms, success can be attained.  

It is said in the Old Testament that God had promised Abraham that Canaan is “the land of milk and honey.” Modern Israel is “the land of milk and money!”