Israelis flock to overseas real estate investment funds

Shmuel Hauser

Israel Securities Authority head Shmuel Hauser warns that the public is taking risks because of the low interest rate.

Adv. and CPA Ehud Barzily, one of Israel's leading taxation experts, was involved in several buyers groups that found that erected residential buildings in Tel Aviv in recent years. He recently diversified his real estate investments through the Hagshama fund (controlled by founder and partner Avi Katz, later known as the owner of Cofix Group Ltd. (TASE:CFX)), which makes joint overseas real estate investments.

The idea is simple. Instead of buying real estate overseas with all the complications, regulations, and property maintenance it involves in a distant and unfamiliar place, investments are made through an Israeli group that buys or develops an entire overseas project on a scale that can reach tens or even hundreds of millions of shekels. Some of the amount comes from the investors in the group, but most of it is leveraged.

In the past two years, in view of the pressure exerted by the government on real estate investors in Israel, these ventures have been booming, especially among small and unsophisticated investors with several hundred thousands of shekels available for investment. Israelis who formerly considered buying a cheap apartment in Haifa or Beer Sheva now prefer to invest overseas through these groups -development groups doing construction, buyers groups, or even groups that merely make connections with foreign developers.

Barzily, who cannot be accused of lacking sophistication, laughs when he is asked whether he ever thought about buying an apartment in Israel, instead of overseas. "You get punished even before you buy," he says, referring to the tax on a third housing unit. "Minister of Finance Moshe Kahlon and Minister of Economy and Industry Eli Cohen are pushing people to invest overseas."

How popular are these groups? Two new funds in this format were reported in the past few days alone. One, Invo Investment Opportunities, is headed by CEO and former Hagshama employee Amalia Shechter and president and former Histadrut (General Federation of Labor in Israel) chairman Ofer Eini. The other is New City, controlled by cofounder and chairman and buyers groups developer Dror Halevi, which has established a platform for joint real estate investments in the US. The two new funds are joining Hagshama, the most veteran company in the sector with a portfolio of 250 properties; CityR, which invests in housing projects in the US; iintoo, which calls itself a social investment network for real estate; and HAP, founder of the Hap Venture Fund for social real estate investments.

A cautious tango with the Securities Authority

This list is only partial. The Israel Securities Authority is talking about dozens more smaller ventures, some in real estate and some in other overseas group investments. The exact volume of capital raised by these funds and groups is unknown, but the total is believed to be in the billions of shekels.

How popular these groups are can also be learned from the Hagshama fund's successful financing round, in which it raised NIS 32 million from private investors in less than an hour, without investment institutions. The money from the offering is earmarked for a development real estate project in London slated to cost NIS 170 million. The fund plans to hold more financing rounds on the same format later this year for designated projects. "When the interest rate is near zero, the real available money is eroding, and the stock exchange is a casino, this instrument is very interesting," says Katz.

The investment and theoretical profits are of course only one side of the coin. The other side features risks and a complication relationship with the Israel Securities Authority. In the absence of regulation and supervision, even if the intentions are good, the investors' risk is substantially higher. Two affairs in recent years are worth mentioning in this context - Hilik Tapiro and Amir Bramly's Kela Fund - involving group funds in a similar format, which were unsupervised (and also dealt in non-real estate investments) and collapsed, causing serious losses for investors.

Most of the real estate investment funds are in a cautious tango with the Securities Authority, mostly concerning the question of what they are and are not allowed to publish and which publications do or do not constitute a call to investors requiring a prospectus. Securities Authority chairman Prof. Shmuel Hauser says that the boom in this sector is based on "an erroneous assumption that real estate is a convenient and less risky alternative to the capital market. Actually, in the long term, investing in the capital market generates a higher return. If you compare investments in real estate and the capital market over a 20-year period, you can see that real estate had a better return only in the past five years."

Hauser adds, "The low interest rate environment has at least one non-positive aspect -the public is become more adventurous and willing to take risks that it would not take in a different situation."

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Shmuel Hauser
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