Wars Are Frequent and Wages High, but Israeli Hoteliers Learn to Cope

The hospitality industry isn’t an easy one, but three managers of small chains have learned to deal with a volatile business environment.

Idan Gross / Olive

It’s not easy being a hotelier in Israel, as almost everyone in the sector will tell you.

Wars and terrorism take their toll on foreign-tourist arrivals, most recently during the Gaza war that caused a wave of cancellations just as the peak summer season was getting underway. Seven months later, the industry is still waiting for the travelers to return.

But less dramatically, building a hotel ensnares you in a bureaucracy of planning approvals and lengthy construction time. Hotels with a kashrut certificate face a host of rules regarding food, work hours and until recently whether Christmas trees were verboten.

Municipal rates and other taxes are steep, as are labor costs. Combined with a strong shekel, at least until recently, those high costs make Israel an expensive place to visit.

The Israeli hotel industry lives with the knowledge that every two or three years something will happen to upset plans and ruin forecasts, so managers have to factor that into their business plans. But the hotel business still manages to draw small entrepreneurs, not just multinational chains.

“I have no logical answer for why anybody should get into this industry. It’s a bug. I really love it and believe in it,” says Amit Porat, who owns and manages the Olive chain of holiday villages. “I also see that it works and can be profitable. Every Israeli businessman has to be half crazy anyway.”

In fact, despite a handful off wars and the global recession, the last seven years haven’t been bad for the industry. Outposts of global chains such as the Waldorf Astoria and Ritz Carlton have opened. Last year, even with the Gaza war, the number of overnight stays fell just slightly to 22.2 million from 22.5 million the year before.

Occupancy rates dropped, but only to 63% from 66%. And revenues in the first nine months of the year, the latest figures available, actually rose slightly.

Just rent it

One alternative to the high costs and risk of developing a hotel from scratch is to bypass the whole process. Just rent a building, get the city to agree to change the zoning designation from residential or office to hotel, and undertake a stylish renovation. That’s the route preferred by smaller chains, giving them the edge of a central location, trendy design and intimacy of a boutique hotel.

That’s what tourists want these days, “experience and lifestyle,” says Danny Lipman, Co-CEO of the Atlas chain of boutique hotels, which has been gracing the Israeli hotel scene for 27 years.

Atlas has expanded explosively in the last five years, growing to 12 hotels from five. It plans to open three more next year, all in prime locations: the Tel Aviv Port, Tel Aviv’s Rothschild Boulevard and downtown Jerusalem’s Bezalel Street.

All Atlas hotels are boutique establishments, not like the giants run by the chains Isrotel and Rimonim. Lipman says he plans to keep it that way, with small hotels containing about 50 luxury rooms.

Atlas manages the hotels; it doesn’t own the building. Its model is to lease buildings for the long term, usually 25 years. It typically shares the renovation costs with the landlord, though Atlas takes responsibility for the design and finishing touches.

Lipman doesn’t believe the usual gripe heard from the Israel Hotel Association that building a hotel in Israel doesn’t pay. “Other areas might be more lucrative, but I can say that I see this as a vocation and a mission,” he says. “True, the Atlas chain is highly profitable, but I’d still do it even if I were earning less.”

Lipman says the last seven years have been terrific for Atlas, and that any hotelier claiming he didn’t do well should be hooked up to a lie detector.

So what advice does he have for anybody wanting to get into hotels?

“If you’re putting up a building, turn it into apartments and sell them. That will get you the best return,” Lipman says. “If you don’t want to sell the property, you have three options: offices, rental apartments or a hotel. If the property is in a touristy area, I’d say a hotel is the most lucrative option.”

This isn’t a business for dilettantes, Lipman cautions. “If somebody with no experience tells me he wants to build a hotel, I’d warn him not to. I know all kinds of people who opened sexy little hotels in Tel Aviv, thinking they’d have an adventure, and were disappointed because they realized they’d have to know something about the business,” he says.

“All kinds of contractors got into it, then realized they could make better investments. I can’t say that building a hotel is the best investment you could make. If I took all my energy and money and looked for the best place to use it, maybe I wouldn’t choose hotels. But that’s my vocation and that’s what I like to do.”

The service ethic

Amit Porat, who owns and manages the Olive chain of holiday villages, has been around the hospitality business since he was small. His mother owned one of Israel’s first zimmers, or bed-and-breakfasts.

He grew up in the industry and fell in love with it. After his army service, Porat set up companies offering technology for the tourism industry, but over the years got more directly involved in hotels.

“They always said that the field of zimmers in Israel was wide open. Travel agents can’t work with it and there’s no service ethic, but I decided to change that,” he says.

As Porat puts it, the first place he tried to set up a holiday village was the first slap he took. “I was nave and there were a lot of things I didn’t know,” he says. “I bought a property in Rosh Pina, where when guests spent the night, water would drip down onto to their faces from the ceiling. After realizing I couldn’t fix the situation, I sold the property.”

Porat didn’t give up but went ahead building his chain. In 2009 he set up the first holiday village in the moshav where he grew up, Kfar Yehezkel. He then built the Breeze in the Village compounds, and Avnei Hushan in Safed. He tallied eight holiday villages in northern Israel, totaling 120 rooms.

“I understood that I had made a mistake with the first property I bought, but I wasn’t wrong in concept,” he says. “Every businessman knows that nobody ever invented anything that works smoothly from the get-go. Problems always arise.”

He owns three of the eight Olive holiday resorts outright. The rest are rented through long-term contracts. Olive aims to build a chain of rural resorts with around 200 rooms.

“The biggest difficulty is marketing. It’s hard to reach customers, and if you don’t have the right infrastructure, you’ll be dragged into the kind of low occupancy rate that the market is talking about today. Then you’re running a big risk,” Porat says, referring to the rate of about 35%.

“I think local zimmers should work together — buy food in bulk to lower costs and market together. For now each does it alone and less well because they’re not hiring professionals for help.”

Opening a couple of cottages behind your house, which is how most zimmers are operated, doesn’t pay, he says.

“The government made a bad decision when it let people do it. The zimmer owners don’t treat them as a business, either, but as a second income,” Porat says.

“There’s a huge oversupply of zimmers, so profitability is declining. Moreover, the cost of living in Israel is affecting returns. We spend more on workers, energy, water and food, so we need more rooms to make a profit.”

Marketing makes the macher

Seven years ago Avi Ataya was angling to get into tourism and heard that Kibbutz Ayalon was selling its holiday village. He wound up buying it with his friend Tal Yeshua with a business plan based on how small B&Bs operate abroad.

Long story short, they decided they didn’t want one location, but a chain. They noticed that kibbutz guesthouses tended to lose money and concluded that the difference lay in marketing.

Today there are four Metaylim hotels with a total of 120 rooms. The idea, beyond providing comfort, is that the hotels are near popular hiking sites, a new concept for Israelis but one that has proved itself, Yeshua says. He spent a lot of sleepless nights, and if a year ago he was confident he had made it, life taught him otherwise.

The Metaylim hotel in Metula on Israel’s northern border required more investment than previously thought, and then the winter of 2013-14 failed to arrive, so tourists didn’t arrive up north either. Then came that terrible summer marked by the Gaza war, so Yeshua and Ataya realized the whole business could go up in smoke overnight.

But, seeing the danger signs in time, they visited their banks (“while we still had some money – you don’t go to the banks when you’re out of money,” says Yeshua), started working with travel agencies and group bookings, and presto.

Yeshua thanks fate for not being young and foolish anymore. If he had been, he might have spent his profits on a house and SUV instead of reinvesting in the business, he says.

“I still think we could collapse. I’m constantly looking at the wall to see writing,” he says. “Survival depends on the ability to read the writing on the wall. All the time.”