Only a year ago, we pointed out the phenomenon whereby, against a background of soaring housing price in Israel together with a shortage of building land in high-demand areas, more and more people with capital to spare were seeing the potential in urban renewal.
At that time, stock exchange-listed real estate companies published a welter of reports on progress in urban renewal projects, with plans for construction of thousands of apartments that were meant to bring in billions of shekels in revenue. This was despite the fact that most of the ventures were at an immature stage, and faced plenty of obstacles before construction could take place, if at all. The risk is such projects did not prevent the financial institutions, which manage the Israeli public’s pension funds, from injecting huge sums into this sector in the hope of boosting returns, for their savers and for themselves. ‘Globes’" inquiries last year revealed that, within a year, the financial institutions had invested over NIS 1 billion in companies engaged in urban renewal, in a combination of equity and loans.
Since then, however, things have changed. The steep rise in interest rates has meant much higher financing costs for both developers and mortgage takers, leading to a substantial slowdown in the local real estate market. It now looks as though this is leading to another wave of urban renewal deals, but this time for a different purpose and stemming first and foremost from the desire of the developers to reduce their exposure and risk in these projects.
A month ago, speaking to "Globes", Haggai Schreiber, chief investment officer of insurance and finance group The Phoenix Holdings, said, "The more time goes on and interest rates don’t fall, companies that went into this environment over-leveraged will have to bring in partners or sell, and this is where opportunities will arise." He specifically mentioned "real estate companies some of which took on many projects requiring a great deal of equity."
It now emerges that The Phoenix spotted such an opportunity in real estate developer Aura Investments (TASE: AURA). Aura has reported an agreement whereby The Phoenix Holdings will inject at least NIS 350 million into it to provide the equity required for four urban renewal projects of the company, which is a specialist in this area.
The investment by The Phoenix will finance 65% of the equity required in each of the projects in accordance with the finance agreement relating to each, in return for which The Phoenix will be entitled to 30% of the profit on each of the four projects after the repayment of its capital investment.
Aura says that next month it will receive NIS 130 million from The Phoenix for two projects already under construction, while NIS 220 million more is expected to be received for two further projects expected to mature in 2024.
In addition, The Phoenix will have a right of first refusal on investing NIS 250 million in a fifth project still at the planning stage, bringing the total potential investment under the agreement to NIS 600 million. Sources familiar with the deal say that it concerns projects in the center of Israel, two of them under construction, two due to begin within the next few months, and a fifth being planned, and that the five projects consist of an aggregate of more than 3,000 new housing units.
In its notification to the stock exchange, Aura, whose share price rose about 11% yesterday in response to the news, giving it a market cap of NIS 1.4 billion, said, "The aforementioned agreement and its implementation will assist the company in advancing and broadening its activity while improving its financial ratios and its financial strength and reducing the amount for debt that needs to be raised to fiancé its activity." Aura is run by its controlling shareholder (52%) Yaacov Atrakchi, who added that the agreement "provides prominent advantages to the company given the interest rate environment and macro conditions."
Sources at The Phoenix said that the agreement related to low-risk projects that would be completed within three to four years and that, with a high degree of certainty, were expected to yield double-digit returns.
Zachi Abou also exploits the opportunity
Another deal indicative of the plight of urban renewal developers was reported by Geffen Residence and Renewal (TASE: GEFR), controlled by Zachi Abou (who also controls Ari Real Estate (TASE: ARIN)).
Geffen reported that it would buy half the rights and commitments of another company in six urban renewal projects for the construction of an aggregate 2,500 housing units in Ashkelon, for a total investment of NIS 10 million.
Geffen did not disclose the name of the company, but did say that "it has been active in real estate development for a decade, specializing in urban renewal." It can cautiously be assumed that here too one of the reasons for the deal is the desire of the selling company to reduce the commitment required for the construction of the projects in question, certainly when they are still "on paper". The share price of Geffen rose 11% yesterday, giving it a market cap of NIS 100 million.
Published by Globes, Israel business news - en.globes.co.il - on April 10, 2023.
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