Fattal Hotels offering short-term rental apartments

Tel Aviv Photo: ASAP Shutterstock

The Fattal chain is buying up apartment buildings in Tel Aviv in response to the challenge from Airbnb.

Fattal Holdings (1998) Ltd. (TASE:FTAL) has been offering 10 apartments in two buildings it owns in Tel Aviv for short-term rentals. One of the buildings, which has four apartments, is in the Neve Tzedek neighborhood; the other, with six apartments, is in in the Yemenite quarter. Sources inform "Globes" that the service will soon be extended to a third building with 19 apartments on Sheinkin Street. "I announced the chain's intention to enter the short-term rental market a number of times in the past," Fattal Holdings controlling shareholder David Fattal told "Globes" today. "We're looking at the changes going on in the hotel and hosting sector all over the world. The world is changing in front of our eyes. My duty to my company, my investors, and myself requires me to examine the changes taking place and act accordingly." David Fattal says that after Tel Aviv, the chain will consider extending the service to other cities in Israel, such as Jerusalem and Eilat, and afterwards also overseas, where most of the company's activity takes place.

David Fattal added, "I know that there are other concerns in this sector, and there will be more. There are trends in the market we work in; there are changes. We'll check out everything, because this is our obligation. Our advantage is that we're willing to take the initiative and innovate; we won't be locked into one place."

Fattal offers apartments for short-term rental through a new subsidiary called Master, headed by his son, Yuval Fattal. David Fattal says that the entry into rental apartments was not reported to the Tel Aviv Stock Exchange (TASE) because "It involves only 10 apartments out of 36,000 rooms; it's not substantial."

Yuval Fattal says that 80% of the guests are tourists and the rest Israelis renting an apartment for up to 10 days. "In the summer, we can draw conclusions about the trial now being made in Tel Aviv, but the purpose is clear - to expand outward to other cities in Israel and overseas, just like with hotels."

David Fattal explains, "Airbnb is a generic term for renting apartments; actually, it's only a marketing channel. The trend shows us that the guest wants a local experience that goes beyond a room and a bed. With all due modesty, we aren't the first to enter this sector; large international chains have penetrated the service apartment sector in the past two years all over the world. Hyatt, for example has the Hyatt House brand. The goal is to give the customer the same local experience he looked for with some kind of quality wrapping. When a guest comes to a Hyatt apartment, he knows that it's not like an Airbnb apartment that's not in such good shape and has maintenance problems. When it's a hotel chain, there's a commitment to quality."

There is nothing new about what Fattal is doing. Booking Holdings CEO Glenn Fogel, who recently visited Israel, commented on the inclusion of Airbnb apartments in a website specializing mainly in renting rooms in hotels, saying that it was mandated by the need to give tourists the entire range of services they are looking for. Such a holistic outlook is becoming increasingly frequent in tourism and aviation.

"Globes": What about the legal aspect of short-term rentals, which has not been regulated in Israeli law and taxation?

Fogel: "In contrast to others, we do everything in a business framework, meaning in compliance with all of the laws. We pay VAT and income tax, and we will pay municipal property tax as required and according to what is decided, whether they decide to classify it as apartments or as a hotel. I hope that whatever is decided is applied to everyone. Both we and the past and present Israel Hotel Association chairpersons said that we weren't against short-term rental apartments; we were in favor of regulating the market, and that's the message. It has to be decided whether Israelis taking such an apartment have to pay VAT, in addition to the whole question of income tax."

"The entire matter of municipal property tax is being considered by the Tel Aviv municipality, which has yet to decide how to approach it and whether or not to demand ordinary residential municipal property tax," Yuval Fattal adds. "This matter is being considered by them, and we're also in talks about it."

"Globes" recently revealed that the Israel Tax Authority was focusing on catching people renting out apartments for short-term rentals who did not properly report their income. In a major operation to catch tax evaders among people renting out apartments, the Tax Authority conducted many audits among people renting out apartments under short-term rentals through websites like Airbnb and Booking.com. The tax assessment hearings for apartment lessors it caught revealed the Tax Authority's interpretation, according to which these apartment owners should be taxed at hotel rates, not apartment rates. This classification also has momentous consequences for the tax burden imposed on apartment owners. Among other things, they are not entitled to an exemption or the lower tax rates applied to those renting out apartments under longer-term leases. In addition, they are also subject to VAT in certain cases. On the other hand, they are entitled to some tax discount when buying the apartment and to recognition of expenses, among other things for maintenance, management, wear and tear, etc.

In the bottom line, renting out a vacation apartment is a business lease on which the marginal tax must be paid, net of all the necessary expenses. The tax rate applied to these apartment owners can vary from 10% to 50%. This is also the case with hotel chain owners who change their business model and enter the vacation apartment rental sector with the buildings they buy for this purpose, not only for their hotel rooms.

"A fair regulatory environment must be ensured"

Hotel Association chairperson Amir Hayek has frequently cited the damage caused by short-term rental apartments to the hotel sector. At the same time, as a director in Fattal Hotels, Hayek himself is holding both ends of the stick to some extent (he declined to respond on this aspect). "I have never stopped, and I will not stop, arguing that the entire regulatory policy on short-term rental apartments should be arranged, as other countries have done, and as is being done in major cities such as Berlin, Barcelona, Paris, and New York," Hayek told "Globes" today.

"The Hotel Association has advocated, is advocating, and will advocate regulation in this area, and I assume that the regulators will also realize that there is no alternative to regulation for the sector, which currently enjoys improper competitive advantages. The regulator has to choose the best model and apply it. In Tel Aviv, there are more Airbnb solutions than hotel rooms: 10,000 apartment rooms versus 9,000 hotel rooms. This is absurd," Hayek complained.

Some in the industry assert that the failure to regulate the sector is deliberate, given the increase in the number of tourists and the shortage of regulated overnight solutions.

Hayek: "I know and respect the position of the minister of tourism in this matter. If they want to bring more investors and developers into the field, they have to ensure a fair regulatory environment and fair competition."

For hoteliers, inclusion of apartments is one more overnight solution they offer as part of their portfolio. What is the Hotel Association's attitude towards it?

"In their plight, the hoteliers will take advantage of the situation as long as it isn't regulated. This area has to be regulated. When it's regulated, there will be no alternative, and then hoteliers and investors will enter it. I'm not talking about the effect on real estate prices or rental apartments in city centers; I'm only referring to regulations on the way to striking a balance. I've had calls from hoteliers who said that the only thing they were sorry about was that they hadn't thought of it before."

The Ministry of Tourism also supports regulation in the sector, and now says, "Given the records being broken in incoming tourist traffic to Israel, the Ministry of Tourism supports the expansion and diversification of overnights for tourists, including a solution for rental apartments for tourists. Any regulation, while welcome in itself, must be simple, so that it facilitates continued Airbnb activity and its expansion."

"We'll be wiser after the summer"

Most of the activity of the Fattal chain's 200 hotels is in various European countries, and the possibility of operating short-term rental apartments there will also be considered. "It's illegal in Berlin,and also in Amsterdam, but we'll make decisions about other places," says Yuval Fattal.

He emphasizes that the way in which the chain operates with rental apartments is by purchasing an entire building and renting out all of the apartments in it. Two such buildings are active and a third will be opened for rent soon. "We don't want to bother tenants. When we created the concept with people from within the chain and also outside it, we decided that we would not use one apartment in a building. It's not fair to the residents or the customers. We're looking for small buildings with 6-10 apartments with potential to rent out all of them."

How does the pricing model work?

David Fattal: "In every sector, the model is built on supply and demand. No one wants to be left with an empty room. The prices can vary from NIS 300 a night to NIS 3,000 and more, but if there's no demand, then the prices will fall, and vice versa. The same is true for the apartments market. It's a question of seasonality and the quality of the apartment."

"The pricing can't be compared to a hotel," Yuval Fattal adds. "This is not a 25-square meter room with no kitchen or living room. The comparison and indication is versus other apartments whose supply at this level is limited. He explains that the apartments are marketed through several channels. "Airbnb is one of the platforms, and it really isn't a strong one for us. We have our own website and a call center, and also other websites such as Booking.com and Expedia, as well as all of the other websites."

Master maintains the apartments by itself. Yuval Fattal emphasizes that the chain has no intention of managing rental properties for other companies. "We're not a management company. As of now, at least, this isn't the direction."

Are you aiming at the luxury niche?

Yuval Fattal: "We're not aiming only at that. We've already had groups of 6-10 people in an apartment who paid NIS 2,000 a night. The apartments are luxurious and well kept, but they don't appeal to any particular group."

What conclusions have you reached after three months of activity?

"It's hard to tell. There was a good month and a bad month. It's not a period from which you can draw conclusions. You have to test it at the annual level. We'll be wiser after the summer."

Published by Globes, Israel business news - en.globes.co.il - on November 12, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

Tel Aviv Photo: ASAP Shutterstock
Tel Aviv Photo: ASAP Shutterstock
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