Israel Races to Build New Hotels to Meet Growing Tourist Numbers

Shortfall projected to reach 10,000 rooms in 2015, when some 5 million travelers are expected to come to Israel.

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Israel is back to building new hotels after a decade-long dry spell, but there still there won't be enough room at the inns three years from now, according to the Tourism Ministry's latest forecast.

The shortfall is projected to amount to 10,000 rooms in 2015, when some 5 million travelers are expected to come to Israel, up from 3.5 million last year, ministry officials said at the International Mediterranean Tourism Market conference in Tel Aviv last week.

That will mean higher room rates and make Israel a less attractive place for visitors when they are deciding on their destination.

"We are seeing a positive trend - certainly a better one than the complete freeze that once prevailed in the industry," said Shmuel Zurel, director general of the Israel Hotel Association. "After four strong years in terms of tourist arrivals, something has to light a fire under the hotel industry."

After a decade of virtually no new hotel construction, some 3,900 new rooms were added between 2009 and 2012, and an additional 5,000 are in various stages of development. The current construction projects will boost the number of hotel rooms across the country to 47,000.

The Israel tourism market is volatile and regarded as quite risky because of the security situation. For instance, hotels registered many cancellations during the spate of rocket fire on Israel in November. Incidents like these deter investors from making a long-term financial commitment to building hotels.

Another constraint is the high cost of developing a new hotel. The cost per square meter for a new hotel, including equipment and a high-level finish to the building itself, runs about NIS 12,000 to NIS 15,000, compared with NIS 5,000 to NIS 8,000 for a residential project.

In addition, hotel rooms have an accelerated rate of deprecation and, because they are subject to seasonal fluctuations in revenue, the return on investment takes longer. Investors can typically expect a return of 6.5% annually for new hotels built from the ground up.

Israel Hotel Association president Ami Federman said the solution was to make it more profitable to expand existing hotels and restore former hotels.

"With hotels that are looking to expand, the infrastructure already exists - personnel, operations, marketing - so the added investment is smaller and it's possible to get a bigger return on it more quickly," Federman said.

During Stas Misezhnikov's term as tourism minister in the last government, several initiatives were made to accelerate hotel construction, among them making the Tourism Ministry (rather than the Industry, Trade and Labor Ministry ) responsible for investing in tourism, doubling the budget for the Tourism Ministry's Investment Administration, and increasing grants for hotel construction in Jerusalem and Tiberias from 20% to 28%.

Some NIS 700 million was allocated to the Tourism Ministry for such purposes between 2009 and 2012, and it is slated to get another NIS 100 million this year.

But there have been failures as well, Misezhnikov conceded, most notably coaxing the Israel Lands Administration to sell land for hotel construction.

"I think that the sale of land for tourism should be in the hands of the regulator, who knows how to do it property, namely the Tourism Ministry," Misezhnikov told the conference.

He said the ILA was concerned with making sure land was available for residential construction. The Tourism Ministry's appeals to Prime Mister Benjamin Netanyahu on the matter had failed, said Misezhnikov, because the Housing and Construction Ministry, which controls the ILA, was not prepared to give up any of its powers over land allocation.

The expansion underway right now is encompassing cities like Bat Yam, which have traditionally been off the tourism map. Bat Yam, just south of Tel Aviv, today has just four hotels with 275 rooms between them. But three more hotels - Sea Hotel, Beach Hotel and Sun Hotel - are now going up and will add a combined 400 or so rooms to the city's inventory.

Jerusalem was 9,500 hotel rooms short in 2009, the biggest shortage in the country. That gap remains large today despite that fact that 2,500 rooms are under construction, according to Tourism Ministry director general Noaz Bar Nir.

"We're most angry about the fact that the city took land that was designated for hotels and turned it over for other uses, mainly cultural," he told the conference. "It's fine that the city has put an emphasis on culture and entertainment in Jerusalem, but how smart is it to have cultural events without any places for people to stay when they come to see them?"

Ilanit Melchior, the director of tourism at the Jerusalem Development Authority, said 12 buildings with a total of 2,000 hotel rooms are planned for the city's entrance.

"Demand for hotels in the city has grown," she said, "but it take times to meet it."

Jerusalem Waldorf Astoria Hotel under constructionCredit: Emil Salman
Tel Aviv's new Alma boutique hotel.Credit: Moshe Gilad

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