The Covid-19 pandemic may have brought global tourism to a halt but that hasn't stopped real estate investment company Israel Canada (TASE: ISCN) from entering the tourism sector and buying, building and renovating hotels.
Last November Israel Canada's hotel arm, which is managed by Reuven Elkes (who owns 20% of the activity) acquired three hotels from businessman Poju Zabludowicz's Tamares chain for NIS 155 million - the Daniel Dead Sea, West Ashdod and West Tel Aviv.
"Due to coronavirus we were able to do the Tamares deal," Elkes told "Globes," "and as part of that deal to set up the infrastructure of the chain." He is referring to the fact that the West brand was bought as part of the deal.
"In 2019, it wasn't possible to buy a room in Israel because the prices were sky high. Hotel real estate was inaccessible but the crisis opened up opportunities. We believe that by November 2021, tourism from abroad will be restored to significant levels."
Until the tourists start coming, Elkes moves around between Hod Hasharon, where he lives, Tel Aviv, where the company's offices are located, and Tiberias where a new hotel will open in August, his pet project - the veteran Galei Kinneret, which has undergone a comprehensive renovation at a cost of NIS 50 million.
"It's a hotel of the level of Mitzpe Hayamim (an exclusive Upper Galilee hotel) and that's the clientele we are targeting. It's a high-end hotel and we will allow in children aged 10 and up."
To tempt tourists, Elkes has recruited chef Assaf Granit, who is a partner to all the food and beverage planning, and who will open a kosher gourmet restaurant in the hotel called Lota.
Israel Canada's hotel arm was set up just two years ago and it already has a chain of nine hotels, three under ownership and six under management.
Another Israel Canada hotel in Tiberias is Lake House, which has 250 rooms in 60 acres of grounds as well as a catering college, which belongs to the company.
The chain's presence in northern Israel also includes the 71-room Nofei Gonen Hotel in 7.5 acres of grounds in partnership with Kibbutz Gonen, which holds a 76% stake. The plan is to expand the hotel to 93 rooms and add a spa and children's club.
It seems that Israel Canada believes in the untapped potential of Tiberias even though the only foreign tourists to come are pilgrims looking for a one stay when touring the Galilee and domestic tourists prefer Eilat and the Dead Sea.
Elkes said, "The Galei Kinneret is a very special hotel and is less dependent on foreign tourism. 65% of guests at the Lake House were foreign tourists but at the moment we are successfully sustaining ourselves with domestic tourism. The hotel was closed for almost the entire Covid crisis. Luckily the catering college remained open and with the little assistance we were able to break even. We believe that all tourism around the Kinneret will only continue to grow, and already today we see some domestic tourism returning to the Kinneret."
But as soon as people can fly, they'll go back to Greece and Cyprus
"True but when they can fly abroad, foreign tourism will also return and that will make up for it. 2019 was an excellent year for hotels around the Kinneret and for hotels generally and I estimate that the rebound after Covid will be strong because Israelis who came to the Kinneret because of force of circumstance and would not otherwise have come - will be back. We also expect and hope that Tiberias will move forward and become more welcoming for tourists. At the moment, to our regret, it is not where it should be."
Israel-Canada's Tel Aviv hotels are the 35-room West and Play, a hotel brand set up by the company and which will open in the summer in the Midtown project. Play will have 118 rooms and is part of the high-rise building with offices and apartments. The other West hotel is in Ashdod and further south the chain also has the Harlington Hotel in Ashkelon (formerly the Holiday Inn), which serves as a Covid hotel and is now undergoing a major renovation. The chain's renovation program also included the Daniel Dead Sea, which reopened on May 1.
The chain does not yet have a presence in Jerusalem but Elkes proudly displays the plans for the company's project in the old Shaarei Zedek hospital in Jaffa Road where they are building two hotels. The first will be a 50-room hotel in the historical hospital building itself and the second will be a Play hotel built on adjacent ground in one of two planned high-rise towers. Construction is to begin in two years and chef Assaf Granit has been hired to cooperate on the project. Elkes also want to open a Play hotel in New York.
Israelis may have discovered vacations in Israel because they have been unable to fly for more than a year but this period has also shown them how high the prices are for a staycation.
Elkes said, "in the past I have served as chairman of the economics committee of the Israel Hotels Association and I have managed the Fattal chain and coped with the issue of prices in Israel. There are crazy costs here and irrational bureaucracy. Fattal has hotels in Germany and there they pay municipal taxes of 0.8% - in Israel it is 4%. And then there are the costs of the rabbinate. Add to that the lack of workers including the lack of Jordanian workers whose quotas are restricted and that hikes employers' costs, mainly in the Dead Sea and Eilat. In actual fact, prices should be even higher."
"If you want to lower prices, comprehensive work is required, bringing in foreign workers, and reducing bureaucratic costs and a flexible municipal tax rate could be adjusted to occupancy, and a progressive tourism tax could be imposed that can do a lot of things."
Perhaps the problem is supply. In Israel there are 55,000 rooms. Is that enough?
"The problem is not the supply of rooms, the problem is the bureaucracy and the costs of the authorities and the salaries of employees. Everything is terribly awkward. When we reach a situation in which we can think about five million tourists (annually), we will be ready with the number of rooms and with a high level of hotels and accessibility."
Everybody is building high-end hotels and there are no budget hotels.
That is also connected to costs. The difference in investment between building a luxury hotel and a budget hotel is not significant, so it is not worth it for us to go for low-cost. And generally, as soon as there is a lack of workers, a three start hotel also become expensive to maintain and the unpaid leave model has completely complicated the business. It has a mental influence on young people who don't want to work and their overall preparedness to return to work in hotels is not high. These guys do not understand how interesting it is to work in a hotel and how much potential there is in it. I am by training an accountant and as a student I worked as a security officer at the Crowne Plaza in Tel Aviv and I fell in love with the industry."
"Perhaps young people think that it is impossible to reach senior positions, and perhaps there is a failure in the way hotels are explaining and showing young people the vision. The matter of grants to discharged soldiers who work in the industry is insignificant because if the same employee works in a restaurant as a waiter, with tips he would earn the same as with the grant. In Italy a waiter can work for 30 years and be very proud of his work but in Israel everybody wants to work in high-tech."
In addition to Elkes's 20% stake in Israel Canada's hotels, former Israel-Canada CEO Ofer Feldman has 5%. The other 75% is held by Israel-Canada controlled by Barak Rosen and Asaf Touchmair.
The company has also won the tender for the Lapid lot in Tel Aviv's Eilat Street and it recently reported that it will build a hotel for the Four Seasons chain on the site. In the overall project on the site, three high-rise 35-40 floor towers will be built with 120,000 square meters of space, which will include 600 hotel rooms, and 500 apartments as well as commercial space and public areas. The plan includes construction of a hotel by Silverstein Properties.
Why would a real estate company want to enter an unstable field like hotels?
"It's a combination of several things. Firstly, hotels are a lifestyle product and Israel-Canada integrates lifestyle into all its projects. The plan is to put a hotel into every area. Barak and Asaf are real estate people of the highest level that there is in the country and there is an enormous advantage in combining real estate with hotels. Hotels are different from managing real estate. We didn't move forward on it until we were certain of our ability to finance from existing activities the hotel infrastructure after we checked out the possibility of making a profit."
What is the direction of hotel real estate at the moment?
"With the exception of the Tamares deal, which reflected a fall in prices, I don't think there will be major price falls. Tourism will know how to recover as has happened after previous crises including the 2008 crisis."
Israeli hotel owners including Fattal have expanded their overseas activities with an emphasis on Cyprus and Greece. "We checked out options in Greece," said Elkes, "but the prices there aren't already so low. The advantage of Greece is the proximity but we will only do a deal if we can find a property for a high quality hotel."
Israel Canada prefers to retain management of the hotels that it buys and in doing so you relinquish the advantage of a well-known brand.
"To my mind, in order to achieve proper profitability, a hotel must balance management agreements with the hotels that it owns. The crisis has emphasized this because the moment that your hotel real estate is owned by you, then you have to balance things with the banks. It's true that there are advantages to an international management brand and mainly to the customers club which it nurtures through loyalty programs. For us as a relatively small company this is a challenge because returning customers such as high-tech employees who stay in a hotel ten times in a year will also come to it on vacation to realize all the points they have saved. But I believe that the more tourists who come, so we will strengthen."
You are not only competing against other hotels but also Airbnb. "This is an area that is simply scandalous. It is a black economy that operates with a license and it's a disgrace that even today this issue has not been dealt with. It should not be that I am responsible for a hotel and I pay VAT and the apartment opposite me doesn't pay VAT. I have talked about this with the Tax Authority and on the issue of unsupervised safety. They divide up apartments into several housing units and if a fire breaks out, there is no control of this. These apartments are a potential for disasters and they harm the quality of life of people."
Where do you like to go on vacation?
"I like everything. With the children in resorts, or in New York or London. Before Covid I was in the French Riviera and as soon as it's possible, I'd like to go back there."
Published by Globes, Israel business news - en.globes.co.il - on June 16, 2021
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