Despite nearly two years of low occupancy, since the outbreak of the Covid pandemic, construction of new hotel rooms is at a five year high, the Real Estate Appraisers Association in Israel reports, in an analysis of data from the Central Bureau of Statistics. In the first three quarters of 2021, construction began on 148,000 square meters of real estate for hotels. This is a substantial rise, not only in relation to 2020, when there were only building starts on 47,000 square meters of hotel space, but also to the years preceding that when tourism was booming. Since 2017, there have not been so many hotel building starts, and the average hotel building starts over the past decade has been 103,000 square meters annually, with Tel Aviv and Jerusalem leading, and zero square meters of hotel building starts in Nazareth.
Tel Aviv and Jerusalem have also led in terms of hotel building starts in 2021. In Tel Aviv, 75,000 square meters of hotel construction was begun in the first nine months of 2021, and 30,000 square meters was begun in Jerusalem. Construction of 18,000 square meters of hotel space was begun at Korazim on the northern shore of the Kinneret, and 7,000 square meters was begun in Haifa. 4,000 square meters was begun in Ayelet Hashahar in the Upper Galilee and 1,700 square meters in Kiryat Shmona. In Eilat only 423 square meters of hotel space was begun in 2021 after 18,000 square meters was begun in 2020. There are plans for thousands of square meters more of hotel rooms in the Red Sea resort.
The rise in building starts for hotels is in response to the historical shortage of hotel rooms in Israel, even though the average national hotel occupancy was just 38% in November 2021, down from 70% in November 2019. The highest occupancy in hotels in Israel in November 2021 was in locations dependent on domestic tourism such as Eilat (72%) and the Dead Sea (68%). But in areas favored by foreign tourists, occupancy was very low: Nazareth (13%), compared with 86% in November 2019, Tel Aviv 41% compared with 81% in November 2019 and Jerusalem 37% compared with 87% in November 2019.
Israel was visited by a record 4.55 million foreign tourists in 2019, the Ministry of Tourism reports. This figure fell to 832,000 in 2020 after the country was closed to foreign visitors in March 2020, at the start of the Covid pandemic, and in 2021 there were 324,000 tourists including 107,000 in the first half of the year.
Isrotel is building 12 new hotels
Gornitzky & Co. law firm managing partner Adv. Kfir Yadgar told "Globes," "Despite the low occupancy in cities reliant on foreign tourism, developers have not stopped activities. The good years before Covid created motivation for investments. The construction is a continuation of the peak that ended in 2010. Ventures have not stopped. Hotel real estate property prices have only risen. We were involved in several prohibition injunctions for hotel properties at the height of Covid and we were surprised how developers 'jumped' on the properties at full price. I would expect the situation of tourism to be an influence but it very quickly became clear that it is not the case because we are talking about a long term asset.
One of the largest operators in Israel's hotel industry is Isrotel Ltd. (TASE: ISRO), which has recently undergone rebranding and is upgrading and building new hotels. The company said that it is investing NIS 3 billion in building 12 new hotels: eight are in various stages of construction and four of them are undergoing planning but should be built by 2026. The company is also investing NIS 270 million over the next two years to upgrade old hotels.
Isrotel VP Projects Operations and General Manager of the Cramim Resort & Spa said, 'This is a strategy of looking ahead. Covid is a virus that won't stay here forever and we believe that by next summer full routine will return and people can come back here for trips. Life will get back to normal and tourism will reawaken and the question is what we should do meanwhile. Stop and not invest and wait for a miracle, or prepare for the future and in our opinion the future will see a reawakening in the global market.
"We hope that next summer will be better and we are banking on technology that will help eliminate the virus. Our projects that are under construction are preparing for the four to five coming years and we think that this is the right time. At the moment people can't take trips or leave the country and we cannot even receive tourists and Israelis are vacationing wherever they can. We have made many adjustments for the Israeli tourist and we are proud that most of our customers are Israelis. There are places that hotels are aiming for tourists from abroad like Tel Aviv and Jerusalem but most of our hotels in Israel rely on Israeli tourists for nine out of 12 months. But the projects currently in planning will be for central regions."
Expectations for a recovery in the hotel sector have brought real estate companies that focus on residential real estate to enter the sector. Avi Carel, chairman of Carel Group, which is building a 140 room hotel in Eilat, said, "Over the past year we have seen the entry of private financing bodies and developers who have marked out the city as a profitable investment option. This is demonstrated by the fact that at the start of 2021, procedures for building began for 10 new hotels including the Brown 42, which we are building, after 20 years in which not a single hotel was built in the city. In Eilat they are preparing to build 8,000 new hotel rooms - some already have masterplans approved and some are in the process with masterplans on the Eilat Municipality's desk."
The challenge is low-cost hotels and Airbnb
High quality hotels have been coping for many years with competition from Airbnb apartments and low-cost hotels. Gabso Group owner Haim Gabso said, "It is clearly challenging but the new hotels have a creative vision about how to bring the customer to us and not to an Airbnb apartment."
Gabso Group has built three hotels, each of 80-90 rooms. The first hotel that it built was leased to Isrotel but it has kept the second for itself after understanding that it is "good business."
White City Buildings began as a developer of preserved buildings in Tel Aviv but has since expanded to urban renewal and hotels. In the hotel sector, the company has been involved in recent years in converting buildings and building 12 hotels around the country with more than 1,400 rooms. Five of the hotels with 600 rooms are in partnership with Isrotel and will be large city center hotels.
White City Buildings chairman Itzik Ben Shoham is also not fazed by competition from cheaper products. "In central Tel Aviv, Airbnb is very expensive because it depends on rents and as rents rise this alternative will not be cheap."
Regarding low-cost hotels he added, "The problem is that in Tel Aviv there are not many prime areas. Tel Aviv's city center has been declared the 'White City' by UNESCO (a world heritage site because of its Bauhaus buildings) and there tourists can walk to the market or the sea. Low-cost has to be in the second circle of Tel Aviv where land is cheaper but the area is not developed enough and there are many building sites - they will be good for tourists in the future but it is impossible to build tourist-style buildings in these streets. The municipality thinks it should encourage complete Airbnb apartment buildings."
Isrotel has decided to divide its hotels into three categories: Exclusive, Design and Collection. Design is the simplest of the three categories, and provides a solution for short stay and business accommodation in city centers. But Isrotel does not define its Design hotels as low-cost.
Cohen said, "The hotels in Tel Aviv are simpler although the Isrotel Design level is not a drop in level because we are still talking about the best architects and that is expressed in the level of finishing and work. Regarding the prices, we adapt ourselves to the price level in Tel Aviv. Despite this, we had a plan to set up a low-cost hotel chain but we didn't move ahead with this. We have all sorts of thought and we are always thinking ahead but we are not so very suited to low-cost."
Regarding Airbnb, Isrotel's Cohen is not deterred. "Whoever books with Airbnb is buying a cat in a sack. There is a legal problem with this on the issue of taxation but we know how to cope with this competition and receive it with love. There is room for everyone and competition does not scare us."
Tsahi Didi CEO of Yossi Avrahami Group, which is building and planning 450 hotel rooms in Eilat and Tel Aviv (and another 10 room hotel in Croatia) said, "The rise in the number of hotel rooms being built in Israel over the past year is no surprise. As the trend for mixed urban use expands, so more local authorities ask developers to integrate hotel rooms as part of their projects and as a condition for approving plans."
Isrotel said, 'In the Port Hotel in Tel Aviv port, which will soon be developed, there will be 154 room and three apartments. This hotel combines hotels rooms with housing units. Overall the concept of mixed use is popular today and it is an area developing in Israel and in some places we allow this."
Published by Globes, Israel business news - en.globes.co.il - on January 9, 2022.
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