The signs are multiplying of a slowdown in the Israeli office market. Talking to "Globes", Shimon Abudraham, CEO of Amot Investments (TASE: AMOT), one of Israel’s biggest income producing real estate companies, expresses growing concern about the situation of tenants in the market. Nevertheless, he says, the company he heads, which holds a variety of types of asset, arrives at the impending crisis in the real estate market strong and suitably prepared.
"As far as tenants are concerned, the market is in a very tough situation," Abudraham says, adding, "Fortunately for us, as a large and professional lessor, we have an advantage over our competitors." Nevertheless, he says, "The business mood in the economy is downbeat. What we are seeing is that new businesses are not being opened, and existing businesses are not expanding." He says that whether it’s a matter of the impact of the global mood, the macro figures, or the fierce protests over political issues in Israel, the result is the same. "In industry, companies are not buying new production lines, and that has an effect."
And yet you reported new lease agreements.
"There are few deals with new businesses. Most of the deals are with existing customers, tenants exercising an option or renewing an expired rental agreement. As far as new deals are concerned, the situation is one of sitting on the fence."
Are high-tech companies seeking to change their contracts with you?
"Rental agreements with high-tech companies are approved by the companies’ boards of directors. After the agreements get underway, they don’t get into petty games with us. I daresay that if there is some extreme event that makes companies want to get out, that could change. But up to now, we have seen companies leaving assets for good reasons. For example, in an asset in Rosh Ha’ayin, an American company bought the high-tech company that leased the offices. So the acquiring company came to us with a checkbook, paid until the end of the period, and left the asset."
In the first half year, Amot Investments’ net operating income was up 11.3%, at NIS 481 million. The company’s management explained the rise by occupation of new assets, and a rise in rents because of a rise in the Consumer Price Index, to which rental contracts are linked.
Amot Investments, controlled by Alony-Hetz Properties & Investments (TASE: ALHE), has 114 income-producing assets with aggregate space of 1.85 million square meters. In the first half year, the fair value of its assets was marked up by NIS 138 million, 67% less than the markup in the corresponding period of 2022. 49% of the assets are offices, 28% are logistics and industrial space, 17% commercial space, and 5% supermarkets.
Because of the smaller revaluation, the company’s net profit was 35% lower than in the first half of 2022, at NIS 323 million. In the second quarter, 75 new rental agreements were signed at Amot assets, relating to 31,800 square meters. The rents in the new contracts were, on average, 6% higher than in the contracts that had ended. The largest increase, 17%, was in logistics and industrial assets.
The capitalization rate on Amot’s assets at the end of the first half rose to 6.31%, its highest level since the end of 2020 (6.52%). The higher the capitalization rate, the lower the value of the asset.
It should, however, be recalled that the capitalization rate fell steadily from a high of 7.4% until the end of 2021, so that there is still no drama here, unlike the situation in the US, where income producing real estate companies have been reporting sharp rises in their capitalization rates.
What can be expected to happen to capitalization rates in Israel in the future?
Abudraham: "The capitalization rate is a derivative of the value of the assets. At the moment, I see no reason that capitalization rates in Israel should rise significantly. There’s a financial spread of more than 3% in the big companies. In the US, capitalization rates were traditionally much lower than in Israel. Assets there were considered safer, until money suddenly became dramatically more expensive. The Israeli market isn’t there, it’s a little different. Nothing lasts for ever, but at the moment I see no reason that things should change."
Published by Globes, Israel business news - en.globes.co.il - on August 8, 2023.
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