Midroog sees Israeli home prices rising in 2020

market forecast

The rating company has an upbeat forecast for the real estate sector in general.

The downtrend in housing sales, which began in 2016 following the start of the Buyer Fixed Price Plan tenders and picked up speed in the ensuing years, has reversed in recent months as a result of the prolonged election process and assessments that housing prices will not fall.

In a stock market forecast for 2020, the Midroog rating agency says that it believes that the rise in housing sales will gather momentum in 2020 and pull prices up. Housing sales will be positively affected by the low mortgage interest rates and the realization that government policy in recent years did not push prices down. "We therefore expect residential development companies to report higher sales and benefit from good access to the capital market and other financial sources," Midroog wrote.

Income-producing real estate: Value increases likely to continue

Given the dramatic fall in yields on the government bond market, income-producing real estate companies got a shot in the arm in 2019, with a significant increase in their market values, leading to unprecedented p/e ratios. Their access to the capital market is expressed in strong demand for bonds at historically low interest rates and long durations.

Values in the income-producing real estate market are also on a rising trend, with capitalization interest rates on properties declining consistently, mainly as a result of the low market interest rate and deals reflecting higher values than the value on the companies' books.

Midroog's economists write, "The upward trend in the values of income producing real estate in Israel will continue in 2020, given the substantial deals conducted recently in the market at a substantially lower discounting interest rate than the discounting rates used in appraisers' valuations.

"The offices market, especially in central Israel, features high occupancy rates and rapid occupancy of new projects. This trend will continue to cause developers to step up their rate of development, which will continue to be high in desirable areas. Rents in buildings in good locations will continue to rise, given the high prices for the new buildings that went on the market. Expectations are that rents will creep upward even for older buildings."

Natural gas: Growing competition and surpluses next year

Midroog believes that the growth in demand for natural gas in the Israeli economy in recent years will continue in 2020, supported by regulation giving priority to natural gas over other fuels. Demand for gas in the electricity sector will continue to grow. "In view of the commercial activity expected at the Leviathan reservoir in 2020, the supply of natural gas in the economy will double, with annual production capacity reaching 23 BCM, while we estimate demand for gas at only 12 BCM. The result will be the emergence of a substantial surplus in the local market, leading to intensification of competition in the sector. Signs of this can be seen in the gas prices in recently signed new contracts," Midroog explains. Gas exports to Egypt and Jordan are likely to considerably moderate, and even control the level of competition in the sector. Natural gas exports will reach 3.5-4.5 BCM in 2020, with the main influence being gas exports to Egypt. "Today, debt in the gas sector amounts to tens of billions of shekels. In our estimation, the sector's financing needs, including debt rescheduling, will be in the $3.5-4.5 billion range in 2020, and most of the debt raised will be used to recycle the debt used to develop the Leviathan reservoir," Midroog writes.

Hotels: Growth will continue

Midroog notes that 2019 featured a rise in the number of tourists visiting Israel in comparison with previous years, accompanied by an increase in the number of tourists stays at hotels. Despite the increase in the supply of rooms, room occupancy has also risen consistently over the years.

"Growth in the sector will continue in 2020, provided that security events do not have a negative impact on incoming tourism. We also expect hotel development to continue throughout Israel, given the demand and the shortage of hotel rooms, even though the current supply is just over 50,000 rooms. Nevertheless, we believe that hotels in Eilat will be affected by the moving of the airport from the city center to Ramon Airport, which is liable to push down the occupancy rate and prices," Midroog says.

Banks: Challenging environment, stable profits

Economic growth and low unemployment supported the banks' revenue and profits in 2019. "In our opinion, the business environment will be challenging for the banking system over the coming year, and will be accompanied by some pressure on profit margins," Midroog states. "However, the banks have managed to devise adequate safety margins for dealing with higher pressure in recent years."

According to Midroog, the banks' credit portfolio will grow by 3-4.5% in 2020, with a focus on mortgage portfolios and medium and large-size businesses, whose risk is now lower than in the consumer and small business sector. This focus will also lead to some pressure on credit spreads. "The banks will maintain fairly stable profits," Midroog predicts, adding, "The main cause of competition in the long term will be innovation. Banks that do not adjust their business model over time are likely to experience substantial erosion in their business profile.

Retail: Competition will continue to wane

Competition in the retail sector tailed off this year, compared with the past, and will continue to do so in 2020. Prices rose last year, with an improvement in gross profit margins in the retail food sector. "In an environment of low internal growth in real terms, expressed in growth in same store sales at most of the chains, food retailers are searching for sources of growth in order to consolidate economies of scale. We therefore expect that the increase in commercial space in 2019 will continue into 2020," Midroog states.

Published by Globes, Israel business news - en.globes.co.il - on December 12, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

market forecast
market forecast
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018