In 2017, the price of a four-room apartment in Tel Aviv was 40% higher than the price of a similar apartment in neighboring Ramat Gan. In early 2020, the ratio was much the same. Today, the gap is greater than 60%. Since the outbreak of the Covid-19 pandemic, Tel Aviv, which was consistently more expensive than the cities around it, has become altogether detached. The gap has become so wide that real estate specialists find it hard to come up with a rational explanation.
From checks made by "Globes" it emerges that in the three years up to the Covid-19 pandemic, the relationship between home prices in Tel Aviv and those in neighboring cities was fairly stable, and that the gap widened after the pandemic broke out, at the same time as a similar phenomenon took hold in office rents. Will inflation and the global economic situation cool the Tel Aviv market? That is at least one scenario.
Central Bureau of Statistics data show that between the second quarter of 2020 and the first quarter of 2022, the average price of a four-room apartment in Tel Aviv rose by 43% to NIS 4.7 million. Over the same period, in five cities around Tel Aviv, the price rise was 15-32%. Someone who buys a four-room apartment in Tel Aviv today is prepared to pay sometimes NIS 2 million more than in the neighboring cities that have been examined. Only two years ago, the difference was up to NIS 1.6 million, which is substantial, but far from what we have been seeing since Covid-19 became part of our lives.
Rents fall behind
While the gap between home prices in Tel Aviv and its neighbors has widened, the rent gap has remained fairly stable.
According to the Central Bureau of Statistics, the average monthly rent for a four-room apartment in Tel Aviv is NIS 7,368. This compares with NIS 5,725 in Ramat Gan, NIS 4,730 in Rishon Lezion, NIS 4,404 in Petah Tikva, NIS 4,803 in Holon, and NIS 4,597 in Bat Yam. That is to say, rents in Tel Aviv are about 30% higher than in Ramat Gan, and nearly 70% higher than in Petah Tikva.
The high rate of purchase price rises in comparison with the rise in rents has led to a substantial fall in rental returns for investment buyers in recent years. Before the Covid-19 pandemic, an investor could obtain an annual return of 2.5% on an apartment in Tel Aviv. This year, the average return is below 2%, a 30-year low.
"This shows that there is a bubble element in apartment prices in Tel Aviv," says Dr. Yair Duchin, who heads the Real Estate Financing MBA program at the Hebrew University of Jerusalem Business School. "Rents reflect the value of the housing services that you receive, and that ratio has remained more or less the same, because there has been no substantial change in this market. Apartment prices, on the other hand, are determined by, among other things, market trends and expectations."
As far as tenants are concerned, Duchin says, "The branding of Tel Aviv is such that people are prepared to pay, and there are tenants who make the calculation and conclude that the costs of moving to apartments elsewhere are such that it’s better for them to absorb the rise in rents."
"The renters are irrational"
Prof. Danny Czamanski of the Faculty of Economics and Business Administration at the Ruppin Academic Center, says, "This is irrational behavior on the part of young people, who are not prepared to live in Hadera or Netanya; they want Tel Aviv. They think that there’s some benefit to living in Tel Aviv, and generally there isn’t. As a result, investors are prepared to pay more for apartments in Tel Aviv, and companies looking for workers in high tech also come to Tel Aviv, and create a situation that has no parallel anywhere in the world, of constantly rising office prices, and occupation rates close to 100%. In other places in the world, when prices rise, the young go somewhere else."
Office boom
All this is closely connected to the office market in Tel Aviv. It too has opened up a wide gap versus the neighbors. A survey by international property management company CBRE finds that office rents in Tel Aviv reached NIS 130 per square meter in June, which compares with NIS 90 in Ramat Gan, NIS 89 in Herzliya, NIS 55 in Petah Tikva, and NIS 50 in Holon.
The simultaneous boom in both markets is not coincidental. "Tel Aviv has become the national office stronghold and center. In recent years, demand has mostly been along the Ayalon Highway, along Yigal Alon Street, and the lateral streets (Ha’arba’a, Kaplan, Hahashmona’im), as far as the Hassan Arafa site (between Hamasger Street, Yitzhak Sadeh Street, and Begin Road, A.M)," says Itai Shafran, vice president of business development at Geocartography. This too is not coincidental. This area meshes with what is called "the scooter space", the area reachable by electric scooter from the neighborhoods in north and central Tel Aviv, and it this that dictates the rises in prices in the city.
Shafran adds that the area is also benefits from accessibility by the best public transport in Israel, with two railway stations and buses of all the bus companies, and the Red Line of the Tel Aviv Light Rail system to pass through it in the future. "Add to that the entertainment and dining offering, and what is actually the first and best mixed-use area in Israel, the strip of the north business district running from the Azrieli junction to Haze’irim Towers." This is precisely the connecting point between the residential market and the office market. "Companies realized that the scooter space is the right place to be," says Shafran.
In other words, "the scooter space" makes everyone pay far more for homes and offices than they would for the alternatives. "Whoever can’t rent 2,000-4,000 square meters will go as far as Ramat Gan and Givatayim, but no further. Why? The fear that the employees won’t come, that they can’t bring them by train and then a 6-7 minute scooter ride," Shafran says.
"This shouldn’t be happening," says Czamanski. "I would expect that even if the decision about where to live isn’t always rational, when it comes to companies and offices, it ought to be rational. Why are they prepared to pay so much more? The distances in this area aren’t so great. My explanation is that it’s about image. They want to be in Tel Aviv, and that young people will come to work for them because they’re in Tel Aviv. It’s a market failure. Were it not for that, everything would balance out and we wouldn’t see these widening gaps with no logical explanation."
What next?
Can the current situation persist? Shafran believes that the light rail will be a game changer. "If a worker can travel in ten minutes from the station at Midtown in Tel Aviv to the station that will be south of the BBC towers in the Bnei Brak business district, then in theory it will be possible attract companies to locate there," says Shafran, although he points out that the station will be some distance away from the BBC towers, which will be a disadvantage for the scooter riders."
If that scenario comes about, and more companies are eventually persuaded to move to business districts surrounding Tel Aviv, taking advantage of the Light Rail Red Line, the office rents gap should narrow, and perhaps young tech workers will become convinced that Tel Aviv is not the only place to live. Czamanski, as mentioned, is not certain that it’s just a transport problem.
Duchin, for his part, sees it as not a matter of scooter or no scooter, but of the US economy. "Israel’s technology industry has drawn a great deal of capital here from the US stock market, and that is what has made possible everything we have seen here in the past few years. Now we’re seeing the surge in inflation there and stock market declines, and if the Federal Reserve continues to act tough in the US, and interest rate rises continue here as well, that will affect the companies and the technology workers, and as a consequence real estate prices in Tel Aviv will be affected too."
Published by Globes, Israel business news - en.globes.co.il - on August 30, 2022.
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