Israel’s Hotels Finding a New Rival in Average Joe

Websites matching homeowners with tourists is creating new competition for hotel industry, warns Fattal CEO Reuven Elkes in an interview.

Reuven Elkes, the CEO of Fattal, Israel’s biggest hotel chain, is looking up and down the country for new properties to develop. But while he is eyeing sites in Jerusalem and Tel Aviv, his worry is less about competition from his fellow hoteliers and more about the challenge from ordinary people renting out their homes to vacationers.

“I see this as a genuine threat to the hotel industry,” he says. “An unfair market is being formed here because homeowners aren’t saddled with taxes, obligations or standards like hotels are. They are in fact competing head-to-head with us hoteliers, and we at the Hotel Association will fight to change this situation.”

Elkes, 44, who also serves as chairman of the Israel Hotel Association's economic committee, assumes a fiery demeanor when the subject of home rentals to tourists is broached. In recent years Israeli hotels have been forced to contend with added competition for tourist dollars. as the practice of renting private homes to tourists has become widespread with the help of websites like airbnb.com, where the volume of reservations has risen 400% in the past year.

The number of Israeli homes registered on the AirBnB website alone, through which 80,000 overnight stays were booked in 2012, jumped from 3,000 in August 2012 to 7,000 in August of this year. Other popular vacation websites like booking.com also offer homes for short stays. With a 7% decline in the number of overnight stays by tourists in hotels in the first half of 2013 from a year earlier, it is apparent that the hotels are losing a significant portion of their clientele.

What can you do to change the situation?

Elkes: "At the association we are using all the means at our disposal and will do everything we can to put this issue at the top of the agenda. We are raising the problem with municipal authorities, the tax authority and the regulators and we trust that they'll act accordingly. It's the government that needs to stand the test, not us. I must say I'm optimistic, but it takes time."

To what extent do you reckon hotels are losing revenues to this rising trend?

"It's hard to estimate the damage, but there's no doubt this has helped bring down the number of overnight stays by tourists. A living and breathing alternative has been born within the same marketing channels as hotels, and it isn't a coincidence that they've fought it in New York. A civilized country needs to fight for properly organized tourism. Heaven forbid if a disaster occur tomorrow in some makeshift apartment, harming the entire tourism industry – making us look like a two-bit country."

This week, however, the New York City Environmental Control Board overturned a fine that had been levied on a Manhattan apartment owner who had rented out his home using AirBnB. But the reversal was only on a technicality: The man’s roommate had been home during the time that he had rented out the apartment and New York’s illegal hotels law is still on the books.

About those prices ...

Israelis looking to vacation during the summer or holidays ran up against prices very similar to the cost of vacationing abroad, but hotels still reported high occupancy rates. So Israelis still haven't given up on domestic tourism. Are vacations in Israel expensive?

"Very reasonable prices can be found most of the year. I agree that on certain days hotel rates are quite high – that's how the market behaves – but looking at the bottom line I don’t think we're charging outrageous prices."

But in any case former Tourism Minister Stas Misezhnikov set up a committee for lowering vacation costs in Israel on the understanding that prices are high. What needs to be done to make vacationing in Israel more attractive?

"First, we should get a break on the issue of municipal taxes. Then the business would become more attractive for developers, more hotels would be built, and we'd see a drop in prices. Local taxes at our hotel in Germany come to 0.8% of turnover while in Israel there will be areas this year where it will already reach 4% of turnover. On top of this add the cost for security, for maintaining kashrut, and rising electricity rates – which drive up prices. David Fattal promised that if our local tax rates are reduced we'll lower our prices."

What's your suggestion on local taxes?

"We looked for a local authority that would go along with us on a trial model of charging taxes according to tourist tax as done abroad, and according to hotel occupancy. That's how it should be done. We need to move forward and not remain captive to outmoded paradigms. We approached the Jerusalem, Tel Aviv and Eilat municipalities and still haven't found a partner. We are very hopeful that Netanya will go along with us. Our goal is to slightly lower the burden on hotels and place it on the tourist. The localities won’t be hurt, and in good years they will receive more money and more tourists – generating more income for local businesses. For tourists the sums are trivial."

The Dan hotel chain netted NIS 138 million in earnings last year while the Isrotel chain finished the year with profits amounting to NIS 75 million. Elkes is only ready to state that Fattal's profit level is among the top in the industry.

Hoteliers often complain about high costs, but you attest to strong profitability and the situation from reports by competitors seems good.

"When you look at profitability on reports it doesn't attest to the net return on assets. The return on hotels is low. If someone builds a new hotel today it can reach a 6% to 6.5% return even if it's very successful, without taking into consideration the difficult years. And there are always difficult years in Israel's tourist industry."

Eyeing Tel Aviv

In the meantime, Fattal is expanding apace. In two months’ time, the doors will open to the 30th hotel in the Fattal chain - and the first addition to the chain since Elkes took over as CEO a year and a half ago.

Ashkelon’s 131-room Shirat Hayam Hotel, which is owned by real estate magnate Benny Baron, will be managed by Fattal under its Leonardo marquee. What most attracted Fattal is the hotel’s location on the Mediterranean shoreline, says Elkes, like those of Herods in Herzliya and another hotel in Netanya slated to open within two years under the chain’s management. Another 60-room, NIS 40 million hotel owned by Fattal is scheduled to open in a year and a half on the Sea of Galilee.

Fattal is also exploring the possibility of developing a hotel in Jerusalem and a 100-room boutique hotel in Tel Aviv in addition to its hotel in the city’s bustling Ramat Hahayal business district.

“There are several deals we’re considering in Tel Aviv and I believe the chain will soon expand there,” says Elkes. “The proposals are for converting office buildings into hotels in light of Tel Aviv’s office space glut.”

Elkes was CEO of the Rimonim group of 10 hotels, principally owned by Israel Land Development Company, when he was tapped by David Fattal to take over as head of the chain, which has 8,000 employees, after Rafi Sade resigned.

“ILDC has various holdings and is less attentive to the hotel business, so it goes without saying that the ability to develop the company in this field is limited,” says Elkes. “In contrast, Fattal is strictly hotel-related, which makes a huge difference.”

David Bachar