With the housing prices in Israel rising fast while annual returns for renting out an apartment in high demand area are less than 3%, "Globes" investigates whether there are more attractive alternatives to real estate investment in office real estate.
High returns but not always easy to rent out
During the Covid pandemic, Israel's high-rise office towers were empty. Even though many employees are now engaged in hybrid work - partly from home and partly in the office - office rents in demand areas are on the rise.
Commercial real estate advisors and brokers Avison Young Israel co-CEO Guy Amosi said, "At the end of 2021 owners of space in one of the Class AAA office towers on Tel Aviv's Derekh Menachem Begin decided that it was time to realize their investment. The leasing agreement that had been signed during the pandemic was relatively low at NIS 120 per square meter per month with three years remaining on the agreement on the first option. We started out requesting a sales price of NIS 25,000 per square meter, returns of 5.76%, and at every meeting with a potential buyer the offers rose by about NIS 1,000 per square meter. At NIS 29,000 per square meter (4.96% returns) the owner decided not to sell."
According to Amosi, in Tel Aviv's central business district - between Yitzhak Sadeh Street and the Ramat Gan Diamond Exchange - the prices of rentals has risen dramatically, so that anybody who bought offices for high-tech and wants to rent them out can make 'exceptional' returns. However, he added, "It is hard to talk today about a representative rental price in the central business district, or a representative sale price or consequently representative returns. There have been sales agreements in Class AAA buildings for NIS 35,000 per square meter and outside of the central business district in class B and C buildings even for NIS 30,000 per square meter, with expectations to one day convert them into residential buildings."
Commercial real estate agent Yoram Kaner said, 'In central Tel Aviv, office space is being leased for NIs 180 and even NIS 200 per square meter and in Ramat Hahayal it is possible to find a lot of empty offices for NIS 60 that it is difficult to lease."
The trend of small investors buying offices for investment has been around for some years, even before Covid, said Anglo-Saxon national commercial real estate division director Oren Glazer. He explained that this trend was a result of the rise in residential real estate prices and the taxation, which deterred investors.
He said, "Investors that have equity of NIS 500,000 find it difficult to buy an apartment so they turn to the alternative income producing property market. It began with the offices market and today developers are producing products tailored for small investors, like a room in and office building. The idea behind this approach is mainly to attract investors from the private sector and to attract people that have not been part of this investment segment.
"Today every investor wanting to enter the market can invest in the commercial market but it has to be studied. The returns in commercial real estate are three times higher than the returns in apartments and there is also tax relief - recognizing expenses and financing deductions."
Amosi cites many advantages in leasing offices. "In leases your initial commitment is low. Your first money is a guarantee that is worth several months rent. In addition, the rental outlay is recognized as a tax expense and there is flexibility. The contract is for several years and whenever you want you can leave. The maintenance is also easy because the owner of the property is responsible for maintaining the building and the tenant only has to maintain the office."
However, Glazer added that a commercial property requires ongoing maintenance and in contrast to an apartment, the disadvantage of this investment in contained in the maintenance. "As long as the unit is leased out that's fine but when a commercial property stands empty it is expensive. There are high municipal taxes and management fees that must be paid and falls on the owner of the property."
The time an office remains on the shelf also has to be a factor taken into account. It's easier to rent out an apartment while an office can remain empty for a long time unless it is in a high demand area. "In the central business district the amount of time that an office stays on the shelf is zero. The rate of vacant offices in Tel Aviv is 2%-3% and in the high demand areas there are no available offices. But in the rest of the country, in contrast, it can reach 20% and this reflects the worthwhileness of the investment."
According to Kaner, "If you want to buy a property that is already leased, it's possible that in the future the tenant will leave and you will need to find a replacement. But if you buy an empty property or one being developed, you have to take into account that that it will take time to lease it out and that you are in competition with many other property owners."
Amosi stressed that outside of the central business district, it is worth investing in an office not for the returns from the rental. "A customer of mine consulted with me whether to buy an office in South Tel Aviv in a 25 year old building for NIS 30,000 per square meter. The decision whether or not to buy was based on several factors. I advised him that only if he believed that one day the building would be converted to apartments then he should buy but that if the building always remains for offices, then in my opinion there was no financial logic in buying it."
Published by Globes, Israel business news - en.globes.co.il - on April 24, 2022.
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