Railway stations fail to realize commercial potential

Tel Aviv Central Station Photo: Eyal Izhar

The company founded six years ago to develop the valuable real estate in and around Israel's stations has achieved nothing.

Passengers arriving on the new high-speed train to Jerusalem at the brand-new International Convention Center (ICC) railway station after innumerable delays, canceled trains, and unscheduled halts might like to buy provisions or a gift, but the station, which covers a huge area, has only one modest kiosk.

The absence of stores at the new station is the least of the things that passengers on this route have to worry about, and is in no way unusual - most railway stations in Israel have at most one small kiosk.

The reason for this is that the new 32,000-square meter ICC station was designed long before the agreement allowing Israel Railways to develop the commercial potential of its real estate. The approval previously granted for some use of the space and the land were expropriated for specific uses in exchange for specific compensation, and it was therefore impossible to expand commerce in it. It is also impossible to construct an office building on it, even though it is located at the highly desirable entrance to the capital city.

In other stations, however, the income-producing space can be expanded and turned into office and commercial space, but this is not happening. The problem is that the absence of stands, stores, and offices not only affects passengers; it also causes Israel Railways and the state treasury a huge monetary loss.

Why is there not a shopping center in every central railway station and a tower above every large railway station in Israel to serve as a business or residential center? Israel Railways would profit from rent paid by developers building on this space, and the state could then reduce the subsidies it pays to Israel Railways. Another key advantage of using this land is the addition of high-demand business centers near railway stations, which will contribute to reducing road congestion. Meanwhile, Israel Railways' expensive real estate space is often left as black holes in the urban fabric, and is simply unused.

In European countries, for example Germany and the UK, large railway stations are high-grade real estate. Many of them contain not only large commercial spaces with a broad range of stores, including pharmacies, book and newspaper stores, etc. but also office towers with shopping centers and hotels.

These facilities are not just for the passengers' benefit; they benefit the railway companies. An entire system of offices and commerce often develops around them, to which people travel by railway. In some countries, railways are able to pay for themselves from this commercial activity; they do not require any subsidies. In Israel, the state provides Israel Railways with NIS 2 billion in subsidies annually.

One concern that has taken advantage of the enormous commercial potential of proximity to a railway station is Azrieli Group Ltd. (TASE: AZRG), which built a shopping mall, office building, and hotel next to the railway station, plus another shopping mall near the Rishonim railway station in Rishon Lezion.

Hundreds of millions of shekels in taxpayers' money

Six years ago, the government founded a real estate development subsidiary of Israel Railways. The company was actually founded only in 2014, two years later, due to delay in the appointment of directors, and began operating only in early 2017. Nir Raz heads Israel Railways' real estate company.

The annual revenue of Israel Railways' real estate development company averaged NIS 40 million in 2015-2017, only 1.5% of Israel Railways' revenue. Most of the tenants in Israel Railways' shopping centers are cafes and food stores. All of the coffee stands in the railway stations are operated by Strauss Coffee under a contract valid until 2019, with a two-year option.

An agreement with Israel Railways, signed in 2014, allows it to plan the development of its land according to the area's needs, in cooperation with Israel Land Authority (ILA). "Development of the built-up areas in Israel Railways' stations is a great opportunity to boost the outlying areas," Minister of Transport Yisrael Katz said when the contract was signed. The huge real estate areas transferred to Israel Railways were described in the media as a "real estate bonanza."

"Accrued revenue is likely to reach NIS 1.5 billion during the development period, and we expect NIS 400 million in regular revenue after the projects in the first 30 stations are completed," then-Israel Railways CEO Boaz Tzafrir told "Globes."

Since then, however, there has been little progress. Israel Railways currently has 45 projects in its stations, but development is very slow. Most of the places have no suitable urban building plan. Actually, there were approved building plans only in Karmiel, Lod, and Modi'in, so the company is taking action "to have urban building plans approved that will allow commercial uses of Israel Railways' sites in order to create planning and development oriented to public transportation, that will restrict the use of private transportation. Development will also serve as a commercial and business anchor for Israel Railways."

The bottom line is that only this year did the company begin carrying out the first projects. The project in Modi'in, which has especially great commercial potential, is progressing at a snail's pace.

Incidentally, in order to obtain the workers' consent to the establishment of the real estate subsidiary and another subsidiary for cargo and the outsourcing of 30% of railway carriage maintenance, the state agreed to a 16% pay raise for Israel Railways' workers. In other words, this structural change cost the taxpayers hundreds of millions of shekels in pay raises over the years with no results to show for it so far.

Every tender requires approval from the Ministry of Finance and ILA

Why is it not happening? Under the agreement signed four and a half years ago by ILA and the state, the state retains ownership of the land, while Israel Railways is the land's authorized user. This means that every use of the land requires approval from the Ministry of Finance and ILA. Every tender planned by Israel Railways requires this approval.

The agreement signed with Israel Railways allows it to develop the enormous business potential of its sites, but does not really enable it to act independently.

Israel Railways' annual reports describe two main obstacles to developing the real estate: finding financing and suitable land for construction, and obtaining regulatory approval. In addition to the regulatory approval that Israel Railways' real estate company must obtain from the Ministry of Finance, ILA, and the local authorities, however, there are also the Ministry of Transport and Israel Railways, which owns 100% of the land. In contrast to Israel Railways' development division, the real estate company is small, with only a handful of employees.

Israel Railways said in response, "In general, a large proportion of the projects the company is promoting involve building new stations and new public infrastructure requiring approval and state budgeting. Until such approval is granted, the project's implementation is delayed, in contrast to any other commercial real estate project.

"Furthermore, the agreement between Israel Railways and ILA allowing construction of commercial areas is new and complicated, and the process of completing the first deals is a long one. In addition, the agreement makes it very difficult to define the areas to the planning and building commissions - a subject that has also been raised for discussion before the Deputy Attorney General. Now that the parties have learned about the process, we hope that the process will become quicker and simpler.

"The company is operating with a small and efficient team to promote a large number of extremely complicated projects in coordination with Israel Railways' development plans and the plans of the Ministry of Finance and the Ministry of Transport. The company this year began carrying out the first projects in its work plan, and is seeking approval for additional urban building plans and continued execution of more projects."

In any case, the state also could and should do more to promote the company, given the enormous benefit of building offices and commercial space above railway stations. Since the state invests billions of shekels a year in Israel Railways, it could have been expected that a budget would be provided for financing some of the first real estate projects or other assistance in financing them. For example, just over a year ago, it became necessary to issue debt for Israel Railways to be used to finance its share of real estate projects, which make it easier for Israel Railways to find real estate partners. As of now, however, Israel Railways is marking time in both railroad tracks and commercial space.

The Modi'in example: Two years just for a land appraisal

An excellent example of the questionable dynamics between the parties involved in all of Israel Railways' real state projects is construction of commercial space above the railway station in Modi'in.

The Israel Railways real estate company has been working on the project in Modi'in since the company was founded in 2014. The planned construction above and around the station will have 20,000 square meters of business, commercial, and hotel space, plus 125 housing units. The project also includes development of commercial space with 1,200 accompanying passenger services on the same floor as the station.

A conference of suppliers was held in 2016, and a design, build, operate, transfer (DBOT) tender for selecting the developers to build and operate the project and operate it for 25 years and then give it back to Israel Railways was to have been published. The tender, however, has not yet been published. According to Israel Railway's 2017 annual reports, the tender is to be published in 2018.

One of the parties involved in the process of constructing the center described the events to "Globes": "The project was halted because of the need to determine the value of the land, which had to be set in advance, because the tender is on the royalties paid to Israel Railways. The administration set a certain value for the land and the district appraiser confirmed it, but Israel Railways said that this appraisal made the entire project economically not worthwhile, and therefore consulted another appraiser, who limited the land's value to the value set by the district appraiser. Israel Railways told the Ministry of finance that it would not financing the project, because it was unprofitable. This entire process took six months, so we easily get to two years just for appraising the land. You also have to know how to work with the state - to pound on the table."

The Modi'in railway station is still empty.

Published by Globes, Israel business news - en.globes.co.il - on November 7, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Tel Aviv Central Station Photo: Eyal Izhar
Tel Aviv Central Station Photo: Eyal Izhar
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