IHIS 2019: Post-Show Wrap Up
Israel builds on growth
Growth in inbound tourism in Israel was building an appetite for economy and midscale hotels, alongside a thriving luxury segment.
Attendees of the Israel Hotel Investment Summit heard that, with a target of five million inbound tourists as soon as next year, demand was high for rooms of all ratings to fill the gaps in supply.
Thomas Emanuel, director, STR, said that revpar had “really taken off last year, driven by rates”. The sector had seen 15% growth in revpar year-to-date and, Emanuel said: “Supply is fairly muted. It’s international visitation, double-digit growth in the last three years in terms of arrivals, which we put down to a fantastic marketing. The biggest growth is coming from Canada, France, Romania, but, in fourth, China.”
Inbound tourism was set to continue, with Amir Halevi, director general, Israel Ministry of Tourism, commenting: “Israel is not only the holy land, it’s a tourist destination, with bars and restaurants. We have a lot of potential and we have increased the grants for hotel projects. We need to double the number of hotel rooms in Tel Aviv, from hostels to luxury hotels, and there is a lot of potential across Israel. Israel is the startup nation.
“The desert is the next brand which we’re going to promote. You can get hiking and biking and a unique atmosphere. When it’s freezing in Europe, come to Eilat.”
Dr Michael Strawczynski, director, research department, Bank of Israel, emphasised the strength of the economy and the waning impact of political uncertainty on performance. He said: “We are at low unemployment, inflation currently below the 1% to 3% target. In goods, we are doing less in term of exports compared to the OECD, but we are doing better than the OECD in terms of services; with tourism and startups. And this is year after year.”
This was underlined by Dr. Leonardo Leiderman, chief economic advisor, Bank Hapoalim, who said: “We are not part of the trade war between China and the US. We do a lot of business with both countries. Britain leaving Europe will not affect us. The Israeli economy is very vibrant and dynamic, growing at around 3% per year growth, much higher than other advanced economy.
“We have delegations of business people coming from Asia. Israel is considered one of the leaving countries for innovation, third after Switzerland and the US. We have more than 300 multinational companies establishing R&D centres. Ours is a vibrant, vibrant society”.
While the number of inbound visitors continued to grow, their profile was changing, as Emanuel noted, and with it the type hotels they wanted to stay in. Elisa Moed, founder, Travelujah, said: “The airlift has never been better and never been cheaper. This country is viewed all over the world as a centre of innovation and new market segments, such as MICE, are discovering the country. There has been a shift towards individual travellers and there has been a proliferation of small, boutique hotels. That doesn't mean groups don't want to come, but there aren't the hotels to serve them.”
Moed described the growth in interest from markets such as eastern Europe, but they said that they were looking for low-cost hotels “so we're not getting the benefit”.
In Tel Aviv, Moed said, 3.5% of apartments were on Airbnb, against 0.5% in New York. This was due less to cost and more “people looking for an experience. There’s a new tourist. They want to do what no-one’s doing, see what no-one’s seeing. They’re travellers, they’re not tourists”.
The global branded operators were eager to enter the market, with Alexis Delaroff, COO, Accor Israel making the most of IHIS to announce that the company had signed a management agreement for a Pullman in Jerusalem.
Accor was not alone in its ambitions. Ilana Edelman, director of development, Hyatt, said: “In terms of lifestyle and branding, experience is everything. We’ve been absent from Israel for a long time and we’re eager to get back - Tel Aviv is up there with New York as a target, with a full-service, managed luxury lifestyle hotel. We’re very serious.
“We’re very flexible. We still own a lot of real estate in Europe and we structure a lot of deals with a long-term view. We set incentives for the owner and the operator, it’s not winner-takes-all.”
Georg Schlegel, managing director, Germany & Central Europe, Choice Hotels, added: “We are slowly but surely trying to get into the market, but we are also looking for Israeli investors who are trying to get into Europe. Israel seems to be a lot about lifestyle and in Europe you don’t even do a lifestyle brand without an economy twist. There is a lot of opportunity here.
“We have all changed over the last 10 years, we didn’t used to take any risk, now we talk to the owners and investors and try to tailor each and every deal. We know that the world has become a lot more complex, so what we offer is a kind of white-label franchising.”
High land costs and restrictive red tape meant that investors favoured the luxury segment, but as the country’s hotel sector matured, it was hoped that demand from consumers for budget products would mean more varied room stock.
Russell Kett, chairman, HVS London, said: “One of the missing links is the midscale and economy sector. Development is inherently expensive and to get a decent valuation hotels need to be an upscale project.”
Shahar Perry, manager, RFR Israel, added: “A hotel as a standalone project doesn’t really underwrite itself and every hotel development now has to have a residential component to make it work. As a responsible developer looking for a decent return a straight up hotel is almost impossible.
“The hospitality sector is one of the most difficult to finance and it needs to see a major shift.”
The panel looked at the Mandarin Oriental Tel Aviv, which was announced two days prior to the conference. The hotel, due to open in 2023, will have 225 rooms, including 44 suites, and 230 Residences at Mandarin Oriental. The project was being developed by Seagate Real Estate.
Perry called for an overhaul in red tape, commenting: “The biggest pressure point on a development is how long it takes to complete and in Tel Aviv the regulatory process is like nothing I’ve seen anywhere else in the world. That is a huge thing which needs a makeover so a hotel can come to market in three years, not seven.”
Kett was confident that the sector would evolve to see more balance in the hotel offering. He said, “Israel is still a very young country. Everything about it is an exciting prospect, but in terms of developing business, we are still very young. It took many years for hotels in Europe to become an asset class - we have to wait for Israel to catch up. We need to keep up the pressure. We will get there and we should get there.
“We’re part of an evolution. Most lenders are concerned about being exposed to the operation - they want someone to take the risk. They are keen to get involved in a leasing situation where a third party takes on the operations and that precludes many of the global operators.
“The people I come across, they have such a zeal to develop here, but they come up against real impediments which are preventing them. Mixed-use developments are easier because the hotel component doesn’t stack up on its own. It would be great to see these barriers come down so that this is no longer the case.”
The shift was already underway, with Meininger signing on its first hotel in Israel, a 210-room, 800-bed site in Tel Aviv, due to open in 2024. Hannes Spanring, CEO, Meininger Hotels said: “We are the first internationally operating hospitality company to bring the hybrid hotel concept to the Middle East. Although the city's supply has grown immensely over the last 10 years, accommodation in the hostel, economy and budget segments is severely under-represented.
The government offered grants to encourage the establishment, expansion and conversion of hotels, which had helped to drive expansion. The move was helping to drive conversion from office buildings and light industry. It was also supporting infrastructure investment, with a new high-speed train link due between Tel Aviv and Jerusalem, a light rail system within Tel Aviv and free buses on Saturdays in Tel Aviv.
In addition to the grants, the solution, Kett said, was to emulate the growth in the economy sector which had been seen in Europe; building hotels which were away from city centres, on already-owned land, with above-average room numbers.