Why Are Israeli Hotels So Expensive?

At an average of $223 a night, Tel Aviv boasts some of the most pricey hotels in the world, with Jerusalem not far behind. Alas, the high prices reflect the cost of running a hotel in Israel.

Assaf Pinchuk

The Norman finally opened in downtown Tel Aviv in October, after years of renovations. The roughly $12 million invested in the boutique hotel is evident in the sensuously lit library bar and magnificent restaurant on the ground floor, the beautiful garden out front and the rooftop pool.

The condition of Israel’s hotel industry is less splendid. When The Norman opened, most hoteliers were still licking their wounds from the latest war in Gaza, which ruined the peak summer season. Yet as air-raid sirens wailed and even though they tried to lure tourists with discounts, many Israeli hotel rooms remained expensive, even compared with Western norms.

Assaf Pinchuk

Prices for tourists vary with exchange rates – thus, hotel stays in Israel have been more expensive for the British than for Americans this year.

In the first half of 2014, Hotels.com tells Haaretz, Israeli hotels were the seventh most expensive among the destinations it checked, in euro terms. In U.S. dollar terms, Israel doesn’t even make the list of the costliest top 20 destinations on Hotels.com.

However, the Bloomberg “World Index Hotels: Cities” (published in May 2014) ranked Tel Aviv hotels the 14th most expensive in the world, at $223 a night on average (Geneva topped the list at $308, with Dubai and the Emirates tying second at $293 per night).

Paris ranked 11th in the Bloomberg list, averaging $232 a night. Jerusalem, meanwhile, was 19th at $203 a night.

How can it be that hotels in Israel, which is not considered a particularly high-end destination, charge so much? Are Holy Land hoteliers a quasi-cartel, charging through the nose because they can? Yes, to some degree. But also, it simply costs more to run a hotel in Israel.

Giant players on a tiny field

First of all, Israel is a tiny country and a small number of companies own most of the 49,549 rooms. Partly because of regulation, claim hoteliers, the entry barriers are too high for new players to enter the game and pose genuine competition.

The Fattal hotel chain alone owns about a quarter of all hotel rooms in Israel. In Tel Aviv, just five groups own most of the hotels. “It’s a game with giant players,” said a hotel consultant who works in Israel and abroad, and they don’t tend to break ranks.

The small hotels – including fairly new boutique hotels – may charge high prices, but they’re still in trouble, says the consultant. Almost all have already undergone a change or two in ownership, even though hotel nights in Tel Aviv – ranked by Lonely Planet as the third-coolest city in the world in 2010 (after New York and, more surprisingly, Tangier) – are so high that they raise the country average.

Like their peers worldwide, Israeli hoteliers naturally jack up prices during peak months, such as during the Jewish High Holidays and summer. From May through March, a room can double in price. There’s not a bed to be had in Tel Aviv in August or during the Gay Pride Parade, when even no-frills hostels charge $300 a night. But come September, there’s hardly a tourist in town. “Tel Aviv is a creative hub. It has a culinary scene, designers, museums, Gay Pride Week, and marathons,” says Leon Avigad, co-owner of the Brown TLV Hotel.

The Norman in Tel Aviv. Renovated at a cost of some $12 million. Photo by Avshalom Halutz

Price is also a function of ranking. Israel only introduced a star-based ranking system – a voluntary one at that – this October. Meanwhile, some Israeli hotels have been pricing themselves as five- or four-star hotels, when by international standards they’re really only three-star.

And while it’s true that tourists pay more than local associations booking group vacations for workers, that’s how it goes. “No country in the world charges locals more than tourists,” shrugs a hotel source.

Usual state of war

Then there are the sporadic spikes in hostilities, from terror attacks to outright war. It is true that the growling jacks up security costs. Like all Israeli institutions, from supermarkets and movie theaters to schools, hotels need guards. The law also requires reinforced “safe rooms” (bomb shelters) on all hotel floors.

Also true is that around the Jewish holidays, for instance, occupancy spikes to 100 percent. But come war, or a terror attack, tourism vanishes except for die-hard Jewish travelers.

Yet over the long run, occupancy at Israeli hotels is about the same as the world norm – very roughly, 60 percent.

“We do not have an occupancy problem in Israel,” states Pnina Elazar Shalev, spokeswoman for the Hotels Association. “Our problem is high costs and heavy-handed regulation.”

So while hoteliers bemoan the state of regional geopolitics and call for state support to get them through the hard times (and publicly traded hotels did issue profit warnings after Operation Protective Edge), the fact is that Israeli occupancy levels do not genuinely suffer from Israel’s wars. Their problems lie elsewhere. And the inference that Israeli tourism would be through the roof if not for the hostilities is immaterial.

One aspect in which war indirectly impacts revenues is that it has cost Israel the lucrative conference trade. No big conferences – the sort with more than 10,000 attendees – have been held here since 2000. “Conference planners prefer quieter destinations so they don’t have to change plans at the last second,” says the hotelier.

Heavy costs unique to Israel

And then there are regulatory requirements. Noaz Bar-Nir, a former top official in the Tourism Ministry, chaired a government committee to reduce the cost of vacationing in Israel. The state here requires things that other nations do not, he says.

Israeli hotels have to have lifeguards at the pool, which not every hotel elsewhere in the world must have, says Bar-Nir (now the CEO of the Harokeah chain of pharmacies).

Then there’s the cost of keeping the hotel kosher, which, among very many other things, involves keeping inspectors on staff and even hosting the inspectors’ kin at the hotel over the Jewish holidays and on Shabbat. They may occupy several rooms during peak season, Bar-Nir says.

There’s also the price of food, which is notoriously higher in Israel than in most of the West, due in large part to economic concentration. “We also pay high prices for cottage cheese, olive oil and eggs, just as households do,” points out Shalev.

The heavy costs are an entry barrier to newcomers. For all their high prices, by international standards Israeli hotels are not particularly profitable, Bar-Nir says.

Finally, Israeli salaries are higher than in other countries competing for Mediterranean basin tourism. The minimum wage in Israel is $13,393 a year (as of October 2012). That compares with $11,582 in Spain, $10,519 in Greece, $7,560 in Turkey, and no minimum in Italy and Egypt.

And there you have it. The industry is concentrated, the state isn’t about to give the hotels a tax break – and expenses are genuinely higher. It does simply cost more to run a hotel in Israel.