The restrictions imposed due to the COVID-19 pandemic have severely hit every sector across the globe, and the hospitality industry is undeniably among the hardest hit.

In Israel, strict lockdown measures were implemented in mid-March, forcing all except non-essential businesses to close, including most of the country’s hotels.

Fortunately, there is light at the end of the tunnel for the lockdown phase and, on 4 May 2020, Prime Minister Netanyahu outlined a gradual easing of lockdown restrictions; the focus of hoteliers has thus shifted from how to manage the closure to developing a sound reopening strategy.

While this was a positive sign for hoteliers, it is important to make a distinction between when hotels will be allowed to reopen and when they should reopen. As with the rest of Europe, we expect hotels to reopen gradually in Israel and that they will likely need to continue making use of the government’s unemployment benefits until demand returns in sufficient quantities, especially from international visitors, to justify a more profitable operation than the cost of remaining closed.

No-one knows the timeline as to how long this pandemic will last or the final net impact on the economy. What we do know is that the hospitality industry is extraordinarily resilient. Past ‘shock’ events and downturns have caused business to plummet; however, the industry performance has always recovered and Israeli hotels have become especially adept at managing the impact of such events.

Even though the pace and degree of the COVID-19 downturn are unparalleled, we are of the opinion that the hospitality industry in Israel will recover and, as in the past, this downturn will create the opportunity for strong returns through well-timed and well-executed investment strategies.

In this report, we examine a set of recovery scenarios addressing the range of potential impacts on hotel values in Israel. We analyse the past hotel performance to determine the baseline for this and we review the tourism market profile to understand the factors affecting the anticipated short- and mid-term return of travel.

Key Takeaways

• Tourism arrivals to Israel hit another record in 2019, growing to 4.5 million (see Figure 1) and resulting in improved hotel performance throughout.

• Hotel values across Israel gained a further 5.2% in 2019 on the back of similar average RevPAR growth for all markets.

• We expect a gradual but accelerated recovery following COVID-19 – RevPAR projected to return to 2019 levels by 2024.

• Supply growth slows – projects will be delayed or abandoned altogether.

• Hotel values to decline in 2020 – to remain depressed until EBITDAs ‘hit the bottom’ and there is evidence of recovery.

• Longer term, values will recover as cash flows improve and capital markets return to more traditional parameters.

• Opportunity for high returns – well-capitalised buyers could take the opportunity to buy distressed assets well below replacement cost and recent norms.

The Context in Recent Years

A Thriving Economy

The Israeli economy has flourished over the last decade and has recorded one of the best performances across all OECD countries. Since 2008, GDP growth has averaged 4.0% a year, which compares to the OECD average of 2.9%. Israel’s economy is characterised by its strong service and industrial sectors, which mainly focus on high-tech products, biomedical equipment, chemicals, and military technology. The country is also referred to as the ‘Start-up Nation’ owing to its incredible number of start-ups, rumoured to be the highest per capita in the world.

Undeniably, the travel and tourism industry has also played an important role, being one of the largest economic sectors in Israel. It contributed US$22 billion (5.6%) to GDP in 2019 and provided close to 230,000 jobs (5.7% of total employment), according to the WTTC.

Figure 1: Tourist Arrivals and GDP Change (Israel)

Source: Central Bureau of Statistics

Tourism Acceleration

The political situation in the region has had a crucial impact on inbound and outbound tourism flows. Following years of geopolitical tension in Israel and the neighbouring states, 2017 marked the turning point and was among the best years in the country’s history in terms of international visitation.

Combined with targeted marketing actions, easing of regulations for visas and an increased number of air routes thanks to the Open Skies agreement which came into effect in 2013, the Israel tourism industry showed impressive growth from 2.9 million tourist arrivals in 2016 to 4.5 million in 2019 (see Figure 1).

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