On Location at IHIS: Israel faces economy challenge

TEL AVIV—Growth in inbound tourism in Israel is building an appetite for economy and midscale hotels, delegates at the Israel Hotel Investment Summit heard yesterday.

The Summit is hosted by Hotel Management magazine's parent company, Questex, and the Israel Ministry of Tourism as part of the International Hotel Investment Forum (IHIF) series.

High land costs and restrictive red tape mean investors favor the luxury segment, but as the country’s hotel sector matured, it was hoped demand from consumers for budget products would mean more varied room stock.

Russell Kett, chairman, HVS London, said, “One of the missing links is the midscale and economy sector. Development is inherently expensive and to get a decent valuation, hotels need to be an upscale project.”

Shahar Perry, manager, RFR Israel, added, “A hotel as a standalone project doesn’t really underwrite itself and every hotel development now has to have a residential component to make it work. As a responsible developer looking for a decent return a straight-up hotel is almost impossible.

“The hospitality sector is one of the most difficult to finance and it needs to see a major shift.”

The panel looked at the Mandarin Oriental Tel Aviv, which was announced two days prior to the conference. The hotel, due to open in 2023, will have 225 rooms, including 44 suites, and 230 Residences at Mandarin Oriental. The project is being developed by Seagate Real Estate.

Luxury, Upper-Upscale are Pacesetters

The higher end of the market looked set to dominate for the foreseeable future as STR noted in 2024, 48 percent of the hotels due to open were luxury and upper-upscale hotels, at 40 percent upscale and 12 percent, respectively.  Thomas Emanuel, director, STR, echoed Kett in describing midscale and economy as, “a massive opportunity”.

Emanuel pointed to growth in the number of budget airlines flying into the country, demand that wasn’t being met by hotels, but which was helping to fill apartments participating in the sharing economy.

Perry called for an overhaul in red tape, commenting, “The biggest pressure point on a development is how long it takes to complete and in Tel Aviv, the regulatory process is like nothing I’ve seen anywhere else in the world. That is a huge thing which needs a makeover so a hotel can come to market in three years, not seven.”

Kett was confident the sector would evolve to see more balance in the hotel offering. He said, “Israel is still a very young country. Everything about it is an exciting prospect, but in terms of developing business, we are still very young. It took many years for hotels in Europe to become an asset class; we have to wait for Israel to catch up. We need to keep up the pressure. We will get there and we should get there“We’re part of an evolution. Most lenders are concerned about being exposed to the operation; they want someone to take the risk. They are keen to get involved in a leasing situation where a third party takes on the operations and that precludes many of the global operators.

Looking to Banish Barriers

“The people I come across, they have such a zeal to develop here, but they come up against real impediments [that] are preventing them. Mixed-use developments are easier because the hotel component doesn’t stack up on its own. It would be great to see these barriers come down so that this is no longer the case.”

The shift was already underway, with Meininger signing on its first hotel in Israel, a 210-room, 800-bed site in Tel Aviv, due to open in 2024. Hannes Spanring, CEO, Meininger Hotels said, “We are the first internationally operating hospitality company to bring the hybrid hotel concept to the Middle East. Although the city's supply has grown immensely over the last 10 years, accommodation(s) in the hostel, economy and budget segments is severely under-represented.

Israel’s Minister of Tourism Yariv Levin said, “Within the framework of the Tourism Ministry's policy of reducing vacation costs in Israel and in order to encourage competition, we are working hard to introduce low-cost hospitality chains into Israel.”

Some Favor Leases

Some of the global operators remained hesitant while the country continued to favor leases.

Christian Michel, VP/development Europe, Wyndham Hotels & Resorts, said, “We want to be more present in the market, expanding under franchises. We’re looking for partners to roll out.

“We are not contemplating leases— we would have to expose our balance sheet and this is not something we want to do. We have key partners who take leases and we franchise with them and support them with some key money supporting their obligations toward pre-opening and this is very successful. We also do management contracts and direct franchises. But we will not be investing directly ourselves.”

The government offered grants to encourage the establishment, expansion and conversion of hotels, which has helped to drive expansion.

In addition to the grants, the solution, Kett said, was to emulate the growth in the economy sector that had been seen in Europe; building hotels that are away from city centers, on already-owned land, with above-average room numbers.

IHIS Panel
At IHIS presentation (l.-r.) are: Evan Weiss, principal, LW Hospitality Advisors; Russell Kett, chairman, HVS London; Shahar Perry, RFR Israel; David Zisser, CEO, Omnam Group. Photo credit: IHIF