Tourism, Finance Ministries Unveil Plan to Slash Hotel Prices

Plan calls for fast-tracking development to add more rooms and send rates lower. But executives are skeptical

Morag Biton

The tourism and finance ministries unveiled a program Wednesday to fast-track construction of new hotels with the aim of adding thousands more rooms over the next five years, luring international chains to Israel and lowering hotel rates 20%.

The plan, which will go to the cabinet for approval on Sunday, aims to add 15,000 new rooms to the country’s stock over the next five years and 27,000 over the next 10. By comparison, in recent decades, only 3,000 new rooms have been developed, officials said.

“There’s not a big enough supply of hotels because it isn’t worthwhile to build them. We appreciate those who do it because they do it under impossible conditions,” Tourism Minister Yariv Levin told a news conference.

“The national program for lowering hotel rates we’re launching will spur a rapid expansion of hotel building, the addition of tens of thousands of rooms and a changed market.”

More and lower-cost hotels would be a boon for Israel’s tourism industry and complement the Open Skies program that has brought down airfares. Finance Minister Moshe Kahlon stressed how the program would make hotels a travel option for lower-income people.

“We’ve seen that everywhere else in the world people with less money take vacations at hotels, and that’s how it should be in Israel," he said.

They key part of the program would be designating hotels as national infrastructure, which would mean that construction approvals would go through a single national infrastructure committee rather than local planning committees. This would speed the time it takes to win approval — a critical factor when investors are putting up money for development and want their hotels to be built and operating as quickly as possible.

Officials said the aim was to reduce the time it takes investors to earn back their original investment on a property to 10 years from the 15-year average today.

Not all hotel projects will qualify. The fast-track plan will be limited to hotel developers who agree to build several properties in at least four locations, one big hotel of at least 500 rooms or two hotels of a combined 300 rooms.

“The aim is first and foremost that the big international hotel chains will enter the Israeli market. They shouldn’t have to contend with our bureaucracy,” said Doron Aharon, the deputy director general for infrastructure development and investment at the Tourism Ministry.

The minimums set for the size of hotel developments was aimed at avoiding the national infrastructure committee getting bogged down in approving small projects, Aharon said.

Hotel projects that want to set aside up to 20% of their floor space for apartments, which would help investors hedge their bets against Israel’s volatile tourism sector while seeking wider sources of financing, would be able to win local planning approval.

Officials said the housing component was aimed at addressing another problem — the housing shortage and rising prices.

Israeli red tape has been the main reason more hotels haven’t been developed, creating a supply-demand imbalance that has sent room rates 70% higher in the last decade. In many cases, it takes a decade from start to finish to get a project completed, which has deterred investment.

Another problem is the low return on hotel investments relative to the volatility of the sector; a big problem is the number of arriving tourists. Wars and terror attacks come regularly and cause reservations to be canceled, sometimes for months.

This isn’t the first time the government has tried to solve the problem. Three years ago, then-Tourism Minister Stas Misezhnikov appointed a committee to examine the problem. It worked for a year and concluded that low profitability — despite high room rates — discouraged development. It recommended measures to cut costs, like lowering municipal taxes (arnona), hotel security and kashrut.

But Levin told TheMarker several months ago that the panel didn’t go far enough in addressing the industry’s problems and wanted to focus on construction times. “There’s no doubt that the problem of supply opposite growing demand is the most dramatic problem concerning prices and the ability to build hotels,” he said Wednesday.

Officials had expressed concern that the Misezhnikov committee’s proposals wouldn’t actually lead to lower hotel rates. On Wednesday, at least one hotelier expressed similar doubts about the new plan.

“I don’t know if building more hotels will ease prices, and I have no idea where they arrived at 20%. What economist could possibly know something like that?” he said, asking not to be named.

He said depreciation accounted for about 12% of a room rate. If the cost of building a hotel fell 20%, he explained, that would cause room rates to drop 2.5% to 3%, so the rest of the 20% decline officials spoke about would have to come from other savings.

Noaz Bar-Nir, who headed the previous panel on hotel sector reforms and is now president of the Israel Hotels Association, said that if room rates fell 20%, so would the supply of hotels, as some properties would be unprofitable and be forced to close.

“There are many hotels operating at low profit margins, and if they have to cut rates 20% they won’t survive,” he said. He lauded the new reform plan said “more has to be done with regulation. They’re addressing things that will take five years to bear fruit.” Reducing arnona or security costs would have an immediate impact, he said.