There's gold in them thar hills ...
Guest houses in Galilee are racking up record profits and spawning a virtual building bonanza.
The Galilee beckons to most Israelis as a tranquil, green refuge far removed from the pollution, traffic and commercial bustle of Tel Aviv and other major business centers. However, the Galilee is also home to the most profitable real estate in Israel, otherwise known as the holiday guest house.
Indeed, neither booming shopping malls in the center of the country, nor office buildings in Ramat Gan's diamond district can compete these days with the Galilee guest house. This real estate gold mine boasts an annual yield of 15-20 percent - double the normal yield on Israeli properties and four times that of residential rental properties.
Galilee bed-and-breakfast owners have capitalized on the relaxing holiday image of the region and transformed the north into a profitable real estate industry. By maximizing the cheap land costs in the country's northern region, tax credits and the relatively slack enforcement of building regulations, Galilee guest house owners have unexpectedly tapped into great fortune.
The success of the Galilee bed-and-breakfast is impressive considering the seasonal nature of the Israeli holiday industry, which operates at full capacity only 4-5 months of the year; the guest rooms operate on average 140 days a year, or almost 5 months. Moreover, it is astounding that vacationers are willing to pay sums exceeding that of the cost of a room in a 5-star hotel in Eilat or at the Dead Sea, for the tranquillity offered by a kibbutz or moshav (semi-cooperative community) in the Galilee.
Undoubtedly, the quaint holiday guest house has become so profitable as to catalyze development in the entire surrounding region. The simple bed-and-breakfast has sparked the construction of restaurants and spas in the region; introduced jeep tours, laundry and maintenance services; and developed tourist attractions. Today many Galilee residents earn their living from associated guest house industries, which generate hundreds of millions of shekels annually; tourism has become a viable alternative to the declining agriculture of the region.
Sarah and Haim Halevi, a couple in their 70s who built a guest house in Moshav Ramot Naftali 16 years ago, represent the average bed-and-breakfast investor. Having taken a financial dive when their chicken coop and apple orchard floundered, the Halevis decided to renovate two vacant rooms - ordinarily occupied by harvest workers - into a guest house for vacationers. Of late, the couple have expanded their guest house into nine rooms and turned their apple orchard into a tourist attraction for visitors, who are invited to pick the fruit themselves.
No Jacuzzi, no reservation
There are currently some 5,000 guest rooms in the Galilee - about 3,200 of them in the Upper Galilee and most of them built within recent years. A survey conducted by MATI (Jerusalem Business Development Center) reported that this Galilee industry generates some NIS 200 million in annual revenues, with profits of about NIS 90 million.
Dorit Elmaliah, director general of MATI's Galilee panhandle branch, said that the guest rooms have changed the way Israelis vacation. "The guest rooms have been around for about 12 years," she explains. "And what is special about them is that the supply created demand: the more guest rooms were built, the greater became the demand for them."
With average profitability constituting nearly 45 percent of revenues, the Galilee guest house would appear to be a highly worthwhile investment. However, a measure of market saturation and new competition has led guest house owners to begin investing heavily in maintenance and upkeep.
"Financing the upgrading of guest rooms is the industry's number one problem due to the increasing demands of the vacationing public," said Elmaliah. "Up until five years ago, for example, no one had heard of a Jacuzzi in a guest room. Now the first thing the owner is asked is, `Do you have a Jacuzzi?' Some guests even check the parquet floor for wear, and based on that, decide whether the place is properly maintained.
"An internal or external spa; a dining room for every few units; a larger number of units; more accessories and attractions - all of these cost tens of thousands of shekels a year. Thus, despite the profitability of this industry, the lion's share must often be sunk back into the guest rooms," she said.
Following the path of most guest house owners, the Halevis, too, began renovations.
"Once, no one knew what a DVD or Jacuzzi was. Now, we can't be without them," Halevi said.
The Halevis recently added a heated swimming pool, spa treatment rooms, a game room and Jacuzzi, at a cost of some NIS 2 million. The increasing investments in renovations have spawned ever-rising prices. A year ago, a double room cost NIS 250-400 per night during the week, and NIS 500-700 on weekends at luxury guest houses. Now, these prices have risen by NIS 100 per night, while profitability has remained the same. This said, whereas regular real estate investments are usually recouped within 10-12 years, the guest houses remain the prime form of real estate in Israel, regaining investments within 5-7 years.
Still, this past year has witnessed a slowdown in the construction of new guest houses.
"A few locales are showing the first signs of saturation," says Elmaliah. "Developers are suffering because the Jewish Agency has stopped extending loans to guest room owners."
A bubble waiting to burst
Rosh Pina is the guest room center of the Upper Galilee. For a while now this pioneer settlement has been a bed-and-breakfast power zone, with some 60 facilities totaling 300-350 rooms. At the media convention held recently in Rosh Pina, occupancy was nearly 100 percent. Still, Tehilla Yisraeli, who manages Villa Tehilla with her husband Amichai, fears that this is simply a bubble about to burst.
"There aren't conventions every week in Rosh Pina," she said. "And we really don't need so many rooms every week. People build guest rooms here in chain reactions, just because their neighbors built some. They are relying on the `If he can, so can I,' principle without stopping to think first. Even as we speak, more guest houses are being built."
The biggest fear plaguing Rosh Pina guest house owners is that 61 additional units will be built in the compound of the town's first school.
"Of course it's good for consumers," said Yisraeli. "More competition means greater investment in upgrades and maintenance, but when the guest house bubble eventually bursts, many of the small-time owners will get hurt."