Feb. 7 (Bloomberg) -- In downtown Jerusalem, a new hotel managed by Hilton International under its premiere Waldorf Astoria brand is finishing construction just months after air raid sirens warned residents of rocket attacks from Gaza.
The $150 million Waldorf Astoria Jerusalem, scheduled to open in summer 2013, is among several new hotel investments gambling that Israel’s potential as a prime tourist destination won’t be damaged in the coming years by more outbursts of political unrest and violence. Israeli Prime Minister Benjamin Netanyahu has called 2013 a year of decision over Iran’s nuclear program, and hasn’t ruled out military action to prevent it developing atomic weapons.
“We know the tourism market in Israel, especially in Jerusalem, is very cyclical, is very sensitive to the security situation,” said Dov Meyer, chief executive officer of Toronto-based Terra Firma Capital Corp. and a partner in the Waldorf project. “Developing in Israel is a long-term project, you don’t make decisions on a dime, and when the market is good here it’s very, very good.”
Tourism is a key Israeli industry, contributing 7 percent to annual gross domestic product, and directly employing about 80,000 workers, according to the Tourism Ministry. Revenue from tourism this year totaled $4.6 billion.
With an abundance of historic and archaeological attractions and its Mediterranean and Red Sea beaches, the country attracts religious pilgrims to holy sites in Jerusalem and Galilee, as well as leisure seekers to Tel Aviv and Eilat. Yet while Israel scored a record high of 3.5 million visitors in 2012, it lagged far behind neighboring countries with comparable attractions such as Turkey, which had an estimated 32 million tourists, and Greece, which recorded 17 million.
While that gap is in part due to Israel’s higher travel and accommodation costs, tourism was hurt in the previous decade by the Palestinian Second Intifada, or uprising, that was accompanied by years of terror attacks, the conflict with Hezbollah in Lebanon in 2006 and the first major Gaza operation in 2008.
Last year ended on a sour note in November and December when Israel again fought with Palestinian militants in the Gaza Strip and rockets were fired for the first time in decades at Tel Aviv and Jerusalem. The number of tourists visiting Israel in those months declined 11 percent compared with the same period in 2011.
To boost long-term investment in the tourism industry, the Israeli government has begun giving grants to new projects, this year totaling about 200 million shekels ($52.9 million), allocated for the construction, renovation or expansion of 37 hotels.
“It’s understood by the government that tourism here is very sensitive to the political and geopolitical environment, and if we want investors to build big hotels for hundreds of millions of shekels, we have to help them,” said Eran Nitzan, the ministry’s senior deputy director for infrastructure development and investments.
In 2012, 1,750 new hotel rooms were approved for construction, and a total of 6,000 are being built or are in the planning stage, according to the ministry. The occupancy rate stands at about 76 percent, relatively high by international standards, Nitzan said. The European Union rate in 2012 was 49.2 percent, according to Eurostat.
Those figures don’t satisfy Ami Federman, vice chairman of Dan Hotels Corp. and president of the Israel Hotels Association. At the association’s annual conference in December, Federman said the ministry’s hotel development plans fall far short of accommodating the five million visitors targeted for 2015.
The hoteliers called on Netanyahu to immediately invest $100 million in a marketing campaign to rehabilitate Israel’s image following the Gaza conflict as an attractive tourist destination. “It is about time to place tourism in a position in our national priorities where it can realize its fantastic economic and social potential,” said Federman.
The ministry is giving preference to hotel grants for areas with unrealized potential, especially Jerusalem and Tiberius, where projects can get a fixed grant as much as 28 percent of investment compared with 20 percent elsewhere. The single biggest award in 2012, 50 million shekels, went to a 250-room hotel planned for Jerusalem’s German Colony neighborhood by Israel’s Isrotel Ltd. Other grants went to projects in Nazareth, Ashkelon, Acre, Haifa and Nahariya.
The Waldorf Astoria Jerusalem, a hotel-apartment complex which got under way before the grant program began, marks a return to the city for Hilton, which manages the Waldorf brand and hasn’t had a hotel there for more than a decade. The prime investor is Canada’s Paul Reichmann, who led global developer Olympia & York when it built London’s Canary Wharf project.
The Waldorf also marks the revival of a historic building that began life in 1929 as the Palace Hotel, originally constructed under the supervision of Jerusalem’s Supreme Muslim Council, and used in recent decades to house the Industry and Trade Ministry. The building’s blend of Roman, Moorish and Arab architecture has been restored, down to the plaque with stone-engraved Koranic quotations adorning the roof-top facade.
Existing hotels have also attracted new buyers, including Jerusalem’s former 185-room Leonardo Inn, purchased last summer by Australian investor Kevin Bermeister and partners for $17.5 million, and reopened as the Jerusalem Gardens Hotel and Spa.
“Hotel investment in Jerusalem has lagged behind the growth in tourism locally and globally, largely because the impact of the Second Intifada,” says Bermeister, who was a founding investor in Skype Inc. “Most of the other wars had relatively short recovery periods for tourism, and they’ve become increasingly shorter over time, so that’s provided a more attractive environment for investment.”
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