Extract from an article in Issue 17, December 10, 2007 of The Jerusalem Report. For full story please subscribe to The Jerusalem Report click here to subscribe. The five-star Palace Hotel and Residences, now rising behind a preserved ornate arabesque facade close to the Old City of Jerusalem, is set to be the last word in luxury - but also to meet the most demanding religious requirements of ultra-Orthodox Jews. So, for example, there will be no mixed swimming there and instead it will boast two pools - one for men and one for women. And apart from meticulous observance of kashrut and the Sabbath, the Palace's main attraction for its target clientele will be its proximity to Judaism's most holy site, the Western Wall of the Temple Mount. When the Palace was first built, in the 1930s, the entrepreneur had a completely different crowd in mind, and a different part of the Temple Mount. He was none other than the grand mufti of Jerusalem, Haj Amin al Husseini, whose goal was to draw rich Arabs from all over the Middle East, and whose other plans for enhancing the status of Jerusalem included the restoration of the Islamic shrines on the Haram al-Sharif - as the Muslims call the Temple Mount. The builder of the new Palace may well be called the grand mufti of developers: none other than Paul Reichmann, the daring 76-year-old ultra-Orthodox Jewish Canadian international real estate mogul, who made a spectacular recovery from the $25 billion bankruptcy of the family-owned Olympia & York Developments Ltd. in 1992. After building up another vast fortune within a decade he announced his retirement in 2005, but soon grew bored and launched a new $4 billion venture last year. Reichmann and his family, who are reported to be investing $170 million in the Palace project, are hardly alone in sensing the interlocking interests of overseas money and religion fueling Jerusalem's luxury real estate market. Though it has been fashionable for years among well-heeled Diaspora modern and ultra-Orthodox Jews to buy or build expensive residences in select Jerusalem neighborhoods, the market for luxury holiday homes in walking distance of the Old City is still booming, and a slew of new buildings for this purpose are being constructed close to the commercial center of Jerusalem, many of them on and around King David Street. "What used to be a luxury home here and there has mushroomed into whole buildings exclusively just for holiday homes. David's Village times ten," says Hebrew University geography Prof. Shlomo Hasson, referring to the pioneering luxury project of the 1990s, designed by Israeli-Canadian architect Moshe Safdie, close to Jaffa Gate and the Old City wall, whose units often stand empty most of the year. This friendly part-time invasion is injecting money and confidence into Jerusalem's poor economy, weighed down by the large local ultra-Orthodox and Arab populations, many of whom sustain their large families on government welfare. But critics say it is also creating havoc by heating up the local real estate market and making Jerusalem unaffordable for most Israelis. What's more, choice parts of the city are becoming gilded ghost ghettos, populated only for a few weeks at a time during Jewish holiday seasons. Moreover, the overwhelmingly Orthodox and ultra-Orthodox profile of the buyers is problematic in a city with no shortage of social, political and ethnic tensions, says Hasson. Downtown Jerusalem has become a lively Friday night bar and restaurant venue, and he fears that that the new development may clash with this trend. Emblematic of the clash in interests between the new market forces and the locals is a dispute between the Reichmanns and Pini Elharar, proprietor of Marrakesh, a kosher Moroccan restaurant. It is located in a small building on King David Street purchased by the developers, in addition to the old hotel, which in recent years served as a government ministry, as well as an adjacent plot, and another office building which has already been demolished. The entire interior of the Palace Hotel building has also been gutted, and the facade is being held up by heavy iron scaffolding. But though work is continuing on the other parts of the building, Elharar is refusing to vacate his protected ground-floor premises, which has housed his restaurant for 26 years and has recently ordered a new sign reflecting his determination to stay put. Elharar claims the Reichmanns are not offering enough compensation. By law he does not have to move even though the building has been sold, and he isn't. "The whole Jewish world suddenly decided that King David Street is the place to be. I welcome them. But I have to be compensated. I spent a quarter of a century building up my client?le. It will cost me a fortune to relocate and recreate what I have built here," says Elharar. Not only businessmen are worried about the impact of the part-time invasion. Avner Haramati, a 55-year-old occupational psychologist, who lives in the upscale Talbiye neighborhood with his wife, a daughter of American immigrants, says that 50 percent of homeowners there are foreigners and most of his building is occupied by absentee owners. Haramati, who has been organizing Israeli residents of the capital to fight the new trend, says that locals are in a rage with American Jewish buyers who are ''destroying the neighborhoods by building monstrous towers and aren't even living here! Jerusalem is being destroyed." Significantly, it's not only the principle that concerns him, but the people themselves. "There is a growing animosity against the Americans with their loud voices and manners. Jerusalem is not some bungalow colony in the Catskills.'' Haramati notes that although the value of his own Talbiye apartment has doubled, his grown children cannot afford rentals in the city. But City Hall and some local merchants say that overall the infusion of cash, brought by the part-time inhabitants, is revitalizing the city and that the sophisticated new arrivals can only enrich the city financially and socially. And the trend has the blessings of David Kroyanker, an eminent Jerusalem architect, urban planner and author of more than a dozen books on the city's buildings and neighborhoods. Involved with plans to turn the Palace into an economically viable hotel for the past 25 years, Kroyanker was hired by the Reichmann team to develop a preservation plan at the site. He says the exclusive buildings for wealthy foreigners, even if empty, are "a lot better than dilapidated buildings," which have dominated prime Jerusalem real estate for years. "I am for anything which eliminates blight. Anyway, there is nothing we can do about it because it's a free market and there are no compulsory residency laws for foreign purchasers of real estate in Israel." Geographer Hasson says there is a great deal to be done to make Jerusalem more balanced. Acknowledging that the new construction is "a great thing" and the "buyers are wonderful Jews and Zionists," he deplores the fact that the high prices (between $9,000-$12,000 per square meter) for the luxury holiday homes have brought up overall prices for apartments. "Whole buildings stand empty most of the year while average Israelis can't afford to buy apartments, and that's bad for Jerusalem.'' In early December, Hasson will convene a first-ever academic conference to address Jerusalem's ghost-town syndrome. "We need an affordable housing scheme in Jerusalem in order to attract young families and students back to the city. We have to find a balance,'' says Hasson. Hasson points out that New York City has recently implemented an "affordable housing'' scheme. In mid-August New York's mayor Michael Bloomberg announced the completion of the first 64 ecologically-correct affordable housing units in the South Bronx (out of a planned 165,000 throughout New York City), financed collaboratively by state, city and private funding. Some Israeli municipalities are also doing what they can to make up for the general freeze on government-financed public housing in effect since the 1980s. Jerusalem gives rent subsidies to university students, but this is like a drop in the ocean, and one of the results of the lack of affordable housing is an exodus of educated young residents. Though foreign residents kick in hefty municipal taxes, the shortfall produced by a shrinking middle-class will cost the city more in revenue and eventually cause an overall implosion, warns Hasson. "Fewer people means fewer schools, supermarkets, shops... everything will be scaled down." He proposes legislation that would compel builders of luxury housing to set aside some apartment stock for rental or purchase by students and middle-class families or, alternatively, giving foreign residents financial incentives to rent their holiday homes out to students. Hasson predicts the foreign buyers would be ''happy to help out, if they knew how serious the problem is." City Hall defends the luxury building boom and says such plans are unnecessary. Spokesman Yossi Gustmann tells The Report that luxury building makes up only a small part of the new housing market and that its effect on the regular housing market is not clear. Jerusalem saw 1,815 new dwellings built in 2005 and 2006, with the average size being under 103 square meters, and new luxury construction (defined as 200 square meters or more) only accounted for 3.5 percent, he said. Moreover, out of 184,800 Jerusalem households only 7,122 were identified as foreign residents. Gustmann says housing projects are initiated and implemented by the private sector. "They respond to market forces and act when there is a perceived need,'' he notes, adding that the municipality had no plan to curtail or limit the luxury market. According to Haramati however, sources in City Hall's planning committee are plainly aware of the problem and have asked him for ideas to minimize the damage. Extract from an article in Issue 17, December 10, 2007 of The Jerusalem Report. For full story please subscribe to The Jerusalem Report click here to subscribe.