Real Estate Developers Flock To Israel'S Hotel Sector

Courtesy: Michal Raz-Chaimovich | News Source:

Income-producing real estate firms want to diversify their business, spread risk, and profit from the flood of tourists coming to the country.

Towards the end of 2019, Azrieli Group Ltd. (TASE: AZRG) announced that it was expanding its activity to the hotel sector with the acquisition of the Mount Zion Hotel in Jerusalem for NIS 275 million. Azrieli will invest NIS 500-600 million more in expanding and renovating the hotel. Like other real estate groups that have already established a presence in the hotel sector, Azrieli stated its confidence in the Israeli hotel sector. Up until six years ago, real estate groups had little confidence in Israeli hotels - a field that was dominated by the three main hotel groups: Fattal (TASE: FTAL), Isrotel Ltd. (TASE: ISRO), and Dan Hotels.

This confidence goes hand in hand with the numbers. Over 4.5 million tourists came to Israel in 2019, compared with 4.1 million in 2018 and 3.6 million in 2017. The increase in the number of tourists is not something to be taken for granted, and is dramatic in comparison with 2016, a very poor year in tourism, when only 2.9 million tourists visited Israel. Sources in the sector agree that the number of tourists will further increase, if there is no major security escalation.

Azrieli Group has hundreds more hotels rooms in the development and construction stages in Modi'in and Tel Aviv. Danna Azrieli, its controlling shareholder and chairman, said when the Mount Zion Hotel was acquired, "The hotel activity fits in well with the group's strategy, and constitutes another growth engine in addition to the group's income-producing real estate activity. This deal fits in with other growth engines that we have developed, including our entry into sheltered housing and data centers in the US."

Azrieli is not the only one. Israel Canada, controlled by Barak Rosen and Assaf Tuchmeir, has founded a hotel company, managed by Reuven Elkes. The model reported by Israel Canada differs from that of the other real estate players who entered the hotel industry. Israel Canada manages its own hotel properties independently, plus other hotels, rather than through an external management company. It has signed an agreement to manage two hotels in Tiberias (Lake House and Galei Kinnereth Hotel, which together have 400 rooms). The company recently announced that it would manage the Soleil boutique hotel in Eilat, and shortly afterwards acquired control of the Publica Hotel in Herzliya for NIS 142 million.

Its hotels will operate under the Play brand - hotels combining residential and office towers built by the company, such as Play's first example - a hotel that will open in the Midtown Tower in Tel Aviv with 120 rooms.

"We do not believe in a management company that only knows how to manage business hotels or resorts," Elkes says. "A hotel chain should be able to manage all types of hotels, and we're already handling both of these segments." The company plans to build more hotels in Tel Aviv (on Rakevet Street and Rothschild Boulevard), and is looking at other cities and also overseas. "Our ambition is to reach city centers in Europe with the Play brand. There are developers who have contacted us to do similar things," Elkes says.

As a former CEO of Fattal Holdings, Elkes knows the weak point of hotels in Israel - high overnight prices.

"In my job as chairman of the economic committee in the Manufacturers Association of Israel, I battled against the state in this matter. A hotel is a very large household, and like everyone, it feels that prices are rising. This is happening even more with hotels. In recent years, the Ministry of Tourism has worked on marketing Israel. Unfortunately, however, nothing has been done to address the costs.

"The increase in tourism and demand is improving the results, but it's not as if hoteliers can get any price they feel like in Tel Aviv because of the demand. There's a competitive market, and it will continue to be competitive. Fortunately, when occupancy rises, profits increase, because it's easier to cover the fixed expenses. Nevertheless, when I look at a four-star hotel in Tel Aviv, the overnight prices aren't as high as people think," Elkes says.

"Five years ago, we made a decision to enter the hotel field," says Priel Attias, co-CEO of Nitsba Group, which plans to open over 2,000 hotel rooms in Israel in the coming years. "We saw some saturation in the offices market, especially in high-demand areas, and we thought it would be a good thing to disperse the risk among other fields. Today, we're in residences, commerce, industry, and parking lots. Profit margins are relatively low in hotels in comparison with offices, but this is an area that we predicted would develop, and it did."

Nitsba is in the process of building hotels in Tel Aviv, Jerusalem, Haifa, and Airport City. The company is also considering an entry into Beersheva. "Every area has its own target market," Attias says, adding that the company would focus on the property side, not the operating and management side.

In 2016, Nitsba acquired control of the Princess Hotel in Eilat.

"Globes": The entry of several players into a single playing field generates demand that sometimes outstrips the supply. Does this make land more expensive?

Attias: "Economically, the demand raises prices, but we work on land that we own. There are some who also profit from this, because a large supply of rooms makes it possible to increase the number of tourists and lower the rates. This is something that happens by itself, without reducing profit, because the quantity makes up for it."

Among the other real estate companies that are entering the hotel sector is the Mivne group (Jerusalem Economy), which will build a hotel in Beersheva, a less important tourist destination. The building will include a hotel with 180 rooms and office floors above a commercial floor in the city center.

The hotel in Beersheva will be the group's first foothold in the hotel sector. The trigger lies in the planning institutions' policy of encouraging multiple uses in new construction plans, together with a surplus of commercial space in the case of Beersheva.

Jerusalem Economy CEO David Zvida explains, "The abundance of commercial space in Beer Sheva made us decide whether we would follow the competition or change direction. We opted for hotels, with a focus on a hotel for the business community."

Zvida says that the potential in hotels, in comparison with the return on offices, is derived from the increase in the number of tourists, "in combination with cheap and neat hotel rooms that are easier to manage. We are considering entering the hotel sector in existing properties owned by the company through rezoning. The properties involved are in Jerusalem, Tel Aviv, Haifa, and Beersheva. Upgrading the properties and rezoning them enables us to increase our volume of construction and significantly reduce the risk in the offices sector. Today, the returns on hotels are higher."

"To create another sector that can be profitable"

What is the right model for real estate companies? Should they leave the managing to hoteliers, or take it into their hands?

If you ask Gornitzky & Co. managing partner Adv. Kfir Yadgar, he says that the answer is clear. "A hotel is a real estate and operating business. When a real estate company takes the operation on itself, it's like a property owner who rents a property to Shufersal and decides to be a retailer, of someone who rents a property to a technology company and starts working in technology.

"When they get into the business itself, it's risky. Founding a management company or taking a hotel without knowing how to manage it is a step that can lose the entire real estate return."

Real estate people, however, have a different view. Elkes says, "Up until five or six years ago, there was a clear shortage of hotel management companies. There were only the three large companies, and nothing else. The demand for more rooms aroused a need for more management companies. At Israel Canada, we decided to create this connection, and to independently manage our properties, and also properties that we didn't own. This enables the company to build hotels in our high-rises, manage them, and create another branch that can make progress and profits for us."

Nitsba gave management of the Princess Hotel, which will open this year after being abandoned for years, to Turkish company Swandor. Nitsba is now negotiating with management companies for its future properties. "We're not afraid of management, because the group already manages hotels in Germany, Spain, the Netherlands, and the Czech Republic. In Israel, however, we prefer to lease the hotels and have someone else manage them. If we don't get the proceeds we want, we'll do it ourselves," Attias says.

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