According to the Israel Ministry of Tourism, the first half of 2018 saw a record number of tourist arrivals in the state, adding more than $3.3 billion into the local economy. There is clearly money to be made in Israel's hospitality and tourism sectors—and international investors are seeking inroads.
Some insiders are already taking advantage of growing opportunities. New York-based JF Capital Advisors has consulted on several Israeli projects and is seeking further investments. As the founder and CEO of JF Capital Advisors, Jonathan Falik leads the firm's hospitality business, including equity and debt placement, asset acquisitions and dispositions, portfolio transactions, joint-venture structuring, asset management, management company and brand evaluation, and strategic and capital markets advisory services.
At the upcoming Israel Hotel Investment Summit, Falik will participate in the panel "Investment: Where are the Deals and Who is Investing?" The panel will examine the main investors in Israel’s market (and what are they investing in), how to attract more diverse investors (international, local, private equity and funds among others), what categories of assets are available and the options available for development or conversions.
Ahead of the conference, Falik shared his insights on the future of Israel's hotel sector, the state's growing boutique sector and the challenges facing foreign investment in the cities.
1. From the perspective of an investor based in the U.S., how would you characterize the hotel investment opportunity in Israel?
Hotel operations in Israel have become much more sophisticated and in line with global institutional practices. Given the extremely strong Israeli economy and continued strength in leisure and business transient travelers, there is opportunity to expand the level and type of hotel offerings and do so profitably.
2. What cities or destination do you think are most attractive for international investors? Is it likely to change in the coming years?
Tel Aviv and Jerusalem will always be the most attractive for international investors. They have strong and consistent demand drivers and are well known international cities so that there is some level of liquidity on a potential future sale or financing opportunity.
3. What is your company’s position in Israel’s market and objectives for the years to come?
Photo credit: JF Capital Advisors
We have consulted on a few projects and keep looking to make investments. We have three distinct strategies that we would like to pursue:
• Creation of a resort and perhaps some urban boutique hotels centered around Ahava-branded spas, products and wellness (resorts in Dead Sea, Eilat and somewhere in the North) as well as smaller urban outposts in Herzliya, Haifa, Tel Aviv, Jerusalem, Tiberias.
• Creation of a small portfolio of high-quality indoor waterpark hotels (similar to a Great Wolf Lodge) with both indoor and outdoor waterpark facilities and high-quality family-friendly guestrooms.
• Creating a portfolio of well-known established brands for international travelers (Residence Inn, Embassy Suites and Hampton Inn) appealing to the sense of comfort and understanding and appealing to the longer-term length of stay than typically experienced in certain major markets.
4. What hotel brands or properties do you think are most interesting to watch in Israel at the moment?
The one to watch most is Airbnb as it creates a significant amount of shadow inventory and makes revenue management and average daily rate strategies more challenging. The major Israeli brand chains such as Fattal, Dan and Isrotel have expanded their offerings and enjoy significant economies of scale and synergies. International brands are significantly under-represented in the market so when they arrive in greater numbers and create a broader marketing platform, operating platform and true distribution, international investors will follow.
5. What is the biggest obstacle for a foreign investor searching for a project to invest in?
In other major international markets there is access to substantially greater detailed and verifiable information regarding occupancy, average daily rate, [revenue per available room], operating margins, [food-and-beverage] contribution. It is also easier to get thoughtful research on projected market and submarket rooms supply growth, on valuation levels, etc.… It is also challenging to obtain debt financing for construction and for ongoing mortgage financing comparable to that which is achievable in most major global markets.
6. How do you compare hotel development in Israel versus other classes of real estate? Is it a safer or riskier bet?
Riskier. The entitlement process can take a long time and is difficult to underwrite. Most of the luxury hotels have been developed by high-net-worth individuals or families rather than more traditional development companies (examples include Waldorf, Mamilla and Setai). Significant amounts of business need to come from abroad and this can be curtailed by military or other political issues. Additionally, there are many more employees needed in a hotel [compared to] an office building or apartment building and this requires greater human resources and access to trained talented employees.
7. As a former board member of the Boutique & Lifestyle Lodging Association, what are your thoughts on the growing boutique hotel scene in Israel, and particularly in Tel Aviv?
I spent five years on the board of the Boutique and Lifestyle Lodging Association. I spend significant amounts of time working on development, acquisition, financing and asset management of boutique and lifestyle hotels. Boutique hotels, especially in Tel Aviv, are complementary to the Israeli mentality and lifestyle in that they are constantly adapting and changing and are a good fit for those that are curious and looking for interesting experiences.
8. What is keeping you busy at the moment?
Working on 16 development deals in all stages of the development process; working on five debt-financing engagements, six equity-raise engagements, several brand and portfolio restructurings, and several expert witness/litigation support projects or engagements.
9. What would you recommend a new visitor to Israel to do during their stay?
Whether religious or not, the Kotel in Jerusalem, the Western Wall and a tour of the old city are critical to embrace history, culture, and see, feel and explore the passion.
Similarly, and though a bit of a schlep, a day climbing the historical fortress Masada and a float in the nearby Dead Sea brings history, perspective and entertainment.
Topping it off is a leisurely stroll on the boardwalk at the beach on Tel Aviv complemented by a dinner overlooking the sea in order to see the modern culture, the culinary environment and the melting pot of people that create such a vibrant city.
10. What are you most looking forward to at IHIS?
I am looking forward to excellent networking with professionals ultimately culminating in several development or redevelopment transactions.