TEL AVIV SETS ITS SIGHTS ON THE BIG LEAGUES

In anticipation of an auspicious future, Israel's financial capital seeks a larger international role

By Robert Sarner, America Israel Business magazine, Fall 1995

Relations between Israel and her neighbors may still be a far cry from the "New Middle East" envisioned by Prime Minister Shimon Peres, but that hasn't stopped Tel Aviv from cashing in on the growing dividends of the peace process.

Nowhere is the recent surge in Israel's diplomatic and business relations with the outside world felt more acutely than in Tel Aviv, the country's financial capital. Business is booming in the Big Orange, as the city is known locally, and much of the growth is attributed to rising foreign investment in Israel. Tel Aviv has become a hub as multinational companies seek a foothold in a market they increasingly perceive as stable and financially attractive.

"We are no longer a dead end," says Dan Gillerman, Chairman of Israel's Chamber of Commerce. "Israel is becoming a major junction in the region, both for the Far East and other areas. And in Tel Aviv over the past year or so, we've hosted the chairmen and CEOs of General Motors, Bechtel, Baxter, Westinghouse, Honeywell, Siemens, Daimler Benz, Philips, Unilever, the Japanese and the Koreans. They're all coming here."

Such foreign interest in Israel's economy augurs especially well for Tel Aviv, home to the country's sole stock exchange, major banks, investment firms, insurance companies, advertising industry and other related services.

If Peres's prophesy of regional cooperation, and even of a Middle East common market, is decidedly premature, the process that was first launched at the Madrid peace conference in 1991 has already ignited a new business dynamic.

The gains from the peace process have come at the same time that Israel's once-sleepy economy awakened. A new entrepreneurial and international spirit helped blow away many of the cobwebs of a sluggish, socialist economy beset by political patronage and large subsidies to business. In its place, a radically transformed economy has emerged, boasting one of the largest growth rates in gross domestic product in the industrialized world.

If the desired comprehensive peace agreement for the entire region were to happen, many business leaders say that Tel Aviv could become not only the financial capital of the Middle East, but also a business center to be reckoned with on the international level.

Increasingly, Israel's improved economy has attracted attention from both foreign businessmen and the media. In a recent cover story on the Jewish state, Business Week's international edition said "the startling success of its (Israel's) high-tech companies reflects a newly charged entrepreneurial business culture."

Once content to be the business center of Israel, Tel Aviv now aspires to be the business capital of the Middle East and - reflecting typical Israeli bravado - eventually an important international financial player.

To that end, Mayor Ronni Milo has appointed a special team at City Hall to devise a master plan that will accommodate and facilitate a bigger, more important business and finance community in the center of the city.

"Every big city has a business quarter, but Tel Aviv's is the central business district for the entire country," says Baruch Yoscovitz, a city engineer who heads the municipality's planning and design department.

Yoscovitz says the city intends to not only strengthen the traditional business quarter downtown, where most banks, insurance companies and the Tel Aviv Stock Exchange have their headquarters, but will support large scale projects that will continue the development of another business area northward along the Ayalon Expressway.

Earlier this year, the city created the Tel Aviv Authority for Tourism, Commerce and Industry after Milo decided to increase the priority of these three sectors for the development of the city.

"We are now offering a whole range of incentives to attract both foreign companies and local businesses including those that may have left in the past for the suburbs and satellite towns," says Moshe Gilzer, Manager of the Authority. "We try to help foreign investors, especially in dealing with the red tape and government bureaucracy. We help them through the whole process."

The city also plans to develop non-residential buildings based on expectations that the number of people employed in the city will keep growing. From 250,000 in 1990, the number is expected to jump to 400,000 within 15 years. To accommodate such growth, Yoscovitz says that 3.2 million square meters of non-residential building space will be added to the city's current office and commercial space, which covers 6.6 million square meters.

Tel Aviv politicians often wax eloquent about their city as a future Wall Street as part of a new, peaceful and prosperous Middle East. They say the Central Business District (CBD), two square kilometers stretching from Allenby Street and Rothschild Boulevard south to the new central bus station, would be its logical nerve center. This neighborhood contains some of the most expensive office space in the country. Companies pay $25 to $30 per square meter for rent, more than double the rate charged in most other parts of the city.

"Today, the business district is home to an amazing concentration of banks, the Stock Exchange and main brokers, insurance companies, investment firms, corporate lawyers and accountants," says Ezra Sadan, an economist and senior consultant to the municipality. "Virtually everybody and everything important connected to business is there. You have a density in the CBD similar to Wall Street, and while Tel Aviv's is obviously smaller, it's more concentrated."

In all, some 70,000 people from the Tel Aviv area converge on the CBD every morning for work. Increasingly, their activities involve contact with the business community abroad. In the past year or two, it's been a rare week when at least one major foreign company did not announce it is opening an office in Tel Aviv or buying into an existing Israeli company.

The amount of foreign money flowing through Tel Aviv has grown sharply in recent years. The city now transacts an estimated $25 billion in trade every year. More and more foreign investments are being deposited into Israeli banks. According to the Central Bureau of Statistics, during the first 10 months of 1995, foreign investment in Israel, reached 1.1 billion dollars, triple the amount during the same period last year.

Ezra Sadan says he's astounded by the number of colleagues looking for Israeli business on behalf of American, European and even Far Eastern firms. "It's a seller's market," he says.

Given the upsurge of foreign interest in Israel, business tourism to Tel Aviv is also growing. Last year, close to half a million foreign visitors came to the city. Approximately one-quarter of these tourists came primarily for business reasons - 3 1/2 times higher than the national average.

"We have fewer people coming here only for tourism compared to Jerusalem, Eilat or Tiberias," says David Galor, a member of Tel Aviv's Urban Planning Department, who is involved in shaping the city's infrastructure for tourism. "We are working on developing hotels and other facilities for international businessmen. We also have to substantially enlarge the existing convention and exhibition infrastructure to attract more international gatherings. Certainly, the demand is there if we had greater facilities."

Leading hoteliers already feel the impact and are preparing for the future. "There's no question that since the peace process began, there's been an increase in the number of businessmen visiting Tel Aviv," says David Taic, CEO of The Nahal Group, one of Israel's largest hotel developers. "Not only has the city's hotel occupancy risen in the past year or two to nearly 80% but businessmen account for a growing proportion of guests. We're basing our future plans on Tel Aviv becoming as much a business capital as a tourist and entertainment center."

For Taic, the trend is unmistakable. "Israel is fast becoming a mini-Japan - short on natural resources but long on brain power and expertise in many fields," he adds. "Despite modern communications, there's still a need for businesspeople to come here to conduct hands-on business."

Demand for new office space in metropolitan Tel Aviv, now estimated at 150,000 square meters a year, has grown so much that developers can't keep pace. Only about 50,000 square meters of new space is opening up each year, although that is expected to grow in the coming years.

"We are a witnessing a tremendous demand for quality office space in Tel Aviv," says David Azrielli, who heads Canit Ltd., which is currently building the triple tower Shalom Center next to the Ayalon Expressway. The first stage of the project, Israel's largest office/retail complex, is set to open in 1998 and when completed the project will offer 120,000 square meters of office space.

One of the most prominent of the buildings now under construction in the CBD is the 25-storey headquarters of Africa-Israel Investments Ltd., the country's largest development company active in office, retail and residential properties and traded on the Tel Aviv Stock Exchange.

"Our project is part of a larger trend in which Tel Aviv will become the financial capital of the Middle East," says Shuka Kislev, a senior official with Africa-Israel Investments. "International companies, especially those raising money or involved with the stock exchange are starting to have representatives in Tel Aviv with an eye on the future that this city will be their main base for their Middle East operations. It has a lot to do with the peace process. This couldn't have happened even four or five years ago."

A long list of recent investment banking arrivals includes Lehman Brothers, Morgan Stanley, Soros Funds, Salomon Brothers, Baring Securities, and Fidelity Mutual Funds.

"I'm extremely optimistic about future prospects for Tel Aviv," adds Kislev. "In the past, until the civil war in Lebanon, people looked at Beirut as the region's financial capital. Now Tel Aviv is the leader. Look at the commercial links we now have with Eastern Europe, Russia and the Far East, in addition to economic relations we're starting to have with certain Arab countries. I believe it's an irreversible trend."

In recent years, the city's growth has attracted many foreign service industry businesses eager to tap a growing market. American restaurant chains and food companies have been at the forefront including McDonald's, Pizza Hut, the Hard Rock Café, Ben and Jerry's and Haagen-Dazs ice cream. Planet Hollywood recently staged a cornerstone-laying ceremony for its future beachfront eatery.

At the event, in the presence of actor and major shareholder Arnold Schwarzenegger, Mayor Milo said he was honored that the company chose Tel Aviv as its first Mid-East location. Planet Hollywood executives say they hope to use Israel as a springboard for expansion in the region.

But not everyone is so certain about Tel Aviv's economic role in the future. "I can see Israel becoming increasingly attractive to foreign investment, but I don't see Tel Aviv being a major financial center, at least not for the next 15 or 20 years," says Sam Bronfeld, managing director of the Tel Aviv Stock Exchange. "Let's face it. Israel is a relatively small market. Switzerland is a peculiar example of a small country that has become a large international financial center. Israel is not such a country. Also, there's a serious limit on big investment opportunities here because the government owns or has controlling interests in many major companies. And it's not privatizing fast enough. When the government steps up its privatization process, there'll be more foreign involvement in our economy."

Michael Eilan, editor of Link, an Israeli business magazine, says that the strong pride of Arab countries and their visceral hostility toward Israel will have to subside considerably before regional cooperation becomes commonplace and Tel Aviv develops into a truly Middle East financial capital.

"The notion that the Middle East is facing a boom and that Tel Aviv might be at its center is interesting and may even be true up to a point," says Eilan. "But if Israelis want a booming and peaceful Middle East, they'll need to take another step forward and move technology and marketing tools to their new partners in the Arab world. Given the overriding reality, Tel Aviv only has a slim chance of becoming a regional business center in the foreseeable future."

Beyond debate is Tel Aviv's pulsating business dynamic and take-charge climate. Not bad for a city that was founded only 85 years ago as a suburb of Jaffa port and which only four years ago was under siege from Iraqi Scud missile attacks. While Jerusalem, less than an hour's drive away, is now celebrating 3,000 years of history, Tel Aviv - which has long promoted itself as "city which never sleeps" - is busy preparing for a new era of business in which it's counting on being, at the very least, a central player.