Israel's hotels overcome challenges with opportunity

(Israel Hotel Investment Summit)

A group of investors, developers, operators and hospitality market experts met at a briefing in Paris this month to discuss the hotel investment market in Israel.

The session started with an overview of hotel investment in Israel by Joseph Fischer, owner of Vision Hospitality & Travel, followed by a discussion on opportunities for international investors and operator groups and the unique conditions to understand when entering the market.

Major opportunities in Israel’s hotel market

The Israel tourism market is experiencing tremendous growth. In 2017, 3.6 million international visitors came to Israel (up 25 percent from 2016), a number expected to go up to 4 million visitors in 2018 and estimated to bring in NIS 20 billion in revenue. This is partly thanks to the Open Skies Agreement with the European Union, which opened air traffic to all European airlines in 2018, creating opportunities for low-cost airlines in particular.

Hotel performance indicators are very positive. The average duration of stays is 7.8 nights, average daily rate and occupancy both are high and seasonality is not a major issue thanks to year-round business travel fueled by the tech start-up sector.

At the same time, hotel room numbers are not growing fast enough to meet the demand. In order to resolve the expected shortage and meet the growing demand, hoteliers must add 9,500 guestrooms in the upcoming years. While a number of luxury hotels have opened in 2018, the low-cost segment is where the need is strongest.

In order to address the issue of undersupply, the Ministry of Tourism is encouraging international companies to enter the market through initiatives to facilitate the construction or conversion of new hotels or expansion of existing ones while giving priority to areas in high demand among tourists.

Major transport development projects also are expected to boost the hotel investment opportunity by improving connections across the country. A fast railway between Tel Aviv and Jerusalem is due to open in Q4 2018, reducing travel time between the cities by up to 75 percent, and the Tel Aviv metropolitan mass transportation system is due to connect the center to satellite cities, with the first phase due by 2021.

Challenges remain 

Despite very positive market conditions, the complexities of the Israel hospitality market still present challenges, particularly for international companies.

The length and complexity of buying land, constructing and permitting make the hotel development process lengthier than in other markets. It is difficult to find plots of land available to buy, let alone any large enough for resorts, for instance. Debt isn’t easily available for international operators because local banks favor local companies and few international banks are present in the market.

Staffing is an issue, as it is in most markets. The government is working to facilitate visas for workers coming from neighboring countries such as Jordan for the Dead Sea and Eilat areas, or further afar such as the Philippines, where the government approved an initiative to bring 3,000 people to work in hospitality.

Key recommendations

Despite the challenges, there are opportunities for international stakeholders looking to enter Israel’s hospitality market.

For developers, hotels with a residential component make finances easier to manage. Conversions are easier and quicker than greenfield developments, bringing the development timeline more in line with other markets. In the past few years, a number of hotels have been converted from existing buildings such as offices, police stations, post offices, or even a former prison as for the Setai in Jaffa.

The biggest demand, and strongest governmental support, is in the low-cost segment. Local brands such as Abraham Hostels have made an impact in Tel Aviv with a modern lifestyle offering that fits the local market. In terms of destinations, investors should consider properties on the periphery of Tel Aviv, where prices currently are much lower than in the center while still boasting great beaches. Crucially, they will benefit from the upcoming transportation system upgrade.

Perhaps the most important recommendation for international operators looking to enter the market is to find a strong local partner or representative who knows the business community and knows how to get to the deals first.

About the Israel Hotel Investment Summit

Part of the International Hotel Investment Forum (IHIF) series, the Israel Hotel Investment Summit (IHIS) is a two-day conference providing in-depth analysis of the foreign investment opportunity into the Israel hospitality sector. IHIS will take place at the Hilton Tel Aviv on 19-20 November 2018 and will include conference sessions, networking opportunities and site visits.