Israel Slated to Get Sorely Needed Affordable Hotels

Number of projects approved for investment grants nearly tripled last year to 35, but Airbnb a tough rival

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A youth hostel, providing budget options for tourists, at the foot of Masada, Israel, September 5, 2012
A youth hostel, providing budget options for tourists, at the foot of Masada, Israel, September 5, 2012Credit: Jorge Láscar / Wikimedia Commons

Backpackers and others looking for affordable places to stay in Israel may have a wider range of options than ever before: Figures from the Tourism Ministry obtained by TheMarker show that most new hotels approved for government investment support are in the budget category.

They show that 60% of approvals during 2019 were for lower priced C- and D-category hotel projects or hostels – either for new builds or for conversion – versus 40% for the higher-priced A and B categories. The year before, the weighting was almost the opposite – 35% for C and D properties and 65% for A and B, the figures show.

The Tourism Ministry categories refer to to the cost of construction rather than future room rates. In C and D hotels, the cost of building a room should not exceed 350,000 shekels ($101,000).

The trend could boost tourism in Israel, where hotels options are heavily skewed toward the premium category. This is one of the factors that makes the country an expensive destination, together with high costs of living and a strong shekel.

The World Economic Forum rated Israel 133rd of 136 countries for price competitiveness in 2017, when the shekel for the purpose of its calculations was about 3.84 to the dollar. It’s now about 3.46 to the dollar, meaning prices are even higher.

In 2016, the government launched a program to lower vacation costs by investing up to 13% into the costs of new hotel projects aiming to charge lower prices. The grant comes on top of the 20% ordinary hotel projects can apply for under the Law for Encouraging Investment.

In 2019, 35 of 59 new projects overall were in the lower-price categories. The year before, it was only 12 out of 34.

Each approved hotel must have at least 25 rooms. Hostels are required to have 70-125 rooms, depending on whether they are youth hostels or not. Those applying for the extra aid have to be careful that they meet the ministry’s criteria or they risk losing the benefits when the hotel is completed.

Hotels built in Tel Aviv don’t qualify for the full investment grant. But a ministry official, who spoke on condition of anonymity, said 22 projects under way in the Meditteranean city would also be lower priced, albeit not as low as the others that were approved.

“The price the guest will pay isn’t only determined by how much was invested in the hotel and services, but also by its location. The price for a room in Tel Aviv is automatically higher – I’m not ashamed to say it can reach the level of New York,” the official said.

Still, he said, the grants play a role in keeping room rates down. “If the investment cost is high, a hotelier can’t lower prices – that’s exactly the reason for the grants. We wanted to promote the development of new hotels with low investment costs, so the hotelier can charge lower room rates. Will he charge lower rates? That’s his decision,” he said.

The Kabbalah Centre in Tel Aviv, which is slated to become a hotel as part of the Fattal groupCredit: Meged Gozani

But competition, mainly from Airbnb, is likely to keep rates low, the source said. “That’s the reason we haven’t interfered in the issue of Airbnb. The entire market in Israel has changed. Hoteliers no longer talk about developing luxury hotels. They are looking to develop low-cost properties, without too many services, like a pool, food and beverages,” he explained.

The Israel Hotels Association says that after many years of no growth, there was an 11% increase in the number of hotel rooms in Israel in 2014-19 to 55,700. That came as incoming tourism grew 55% over the last three years to reach a record of more than 4.5 million in 2019.

“While demand [for hotel rooms] grew in tandem with supply, if we hadn’t taken the steps we did, the prices would have been for new rooms would be 20-30% higher,” the official said.

All told, the Tourism Ministry last year approved aid totaling 296 million shekels for new hotel projects or conversion valued at 1.4 billion shekels. They represent 4,500 rooms total and 1,400 hostel beds.

Among the projects that were approved was one for 32 rooms in Jerusalem by Brown Hotels, a boutique chain and the Fattal chain to convert the former Kabbalah Center in Tel Aviv and an adjoining building into a hotel. The Astral Hotels chain got approval for a 456-room hotel in Eilat and to add to its existing Astral Village Hotel another 220 rooms.

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