"We're seeing a 5% drop in rents for office space, and the trend is worsening with the massive construction of offices in the center of the country, which will also affect office prices in the periphery," said Melisron Ltd. (TASE: MLSR) CEO Avi Levy at the "Globes"-Dun and Bradstreet Israel Forum last week. "Globes" editor in chief Hagai Golan was the moderator.
"Unlike commercial property, it is much easier for high-tech companies to move their offices from place to place if the rent is tempting, and we see such moves. Companies threaten to move, and we're forced to lower their rent," added Levy.
Levy said that the occupancy rate at Melison's malls was 100%, and that the company does not have to lower rents for tenants, because demand is rigid. "In Beersheva, we built a large and powerful mall that changed the city's commercial map, and we're seeing our rivals' proceeds and rent slumping. At Melisron, despite the pressure on rents, demand is still rising for the existing space."
No bubble anywhere in Israel
The forum examined various aspects of the real estate industry, including the residential and income-producing property markets. "If a foreign expert were to come to Israel, he'd say that home prices in Israel should rise further," said Shikun & Binui Real Estate Ltd. CEO Tamir Dagan, during the session on home prices. "What is holding back prices now is the declining ability of young couples to buy an apartment."
In an interview with "Globes" at the World Economic Forum at Davos in January, Nobel Prize Laureate Robert Shiller cautiously said that his data on residential prices in Israel indicated that there might be a bubble. Participants at the forum were asked whether there was a residential real estate bubble in Israel.
"There are home prices in the State of Israel and there are home prices in the State of Tel Aviv. In Tel Aviv, prices are no longer at the economic equilibrium, so in my opinion, there is a bubble there," said Hanan Mor Group - Holdings Ltd. (TASE:HNMR) CEO Hanan Mor. "Elsewhere in the country, such as Haifa, Jerusalem, and Beersheva, we're at equilibrium. Homebuyers' purchasing power is falling and people are now struggling to buy a home. The meeting point of the supply and demand price is not at a normal level."
Mor was the only forum participant who believes that there is a real estate bubble in Tel Aviv.
"There is no bubble anywhere in Israel, not even in Tel Aviv," said ZMH Hammerman Ltd. (TASE:ZMH) CEO Haim Feiglin. If we compare prices in Tel Aviv with prices in the West, Tel Aviv still has room to rise toward Paris and London. There are no ghost towns without residents; there is no such thing in Israel. What might be linked to a bubble is the tax bubble. In real estate, there are taxes at every stage: on the land; on the labor; on the end consumer. This is tax upon tax upon tax, and it's a problem. Contractors transfer huge amounts of capital from the consumer to the central government, and should be dealt with."
"There is no bubble in Israel, or in apartment prices," agrees Real Estate Appraisers Association in Israel chairman Ohad Danus. "Prices have risen because of building costs, VAT; developers' profits are falling, and most of the rise is because of land, which is almost entirely sold by the government, which is the main beneficiary of the rising prices. Israel has failed in the past few years in creating supply in high demand areas which could stem the rise in prices."
"In the past few years, construction costs substantially boosted the cost of apartments," said Dagan, citing an additional factor in rising home prices. "Contractors are operating at low capacity and at low profits. There is a serious labor problem in Israel, and nothing is being done about it. It also must be said that this lowers the quality of construction. Today's workers are not always skilled workmen, and this affects the entire industry."
"The government shouldn’t maximize profits," said Property and Building Ltd. (TASE: PTBL) CEO Segi Eitan, commenting on an Israel Land Authority tender for the sale of land in Kibbutz Galil Yam, outside Herzliya, in which the price was closed at NIS 1 million per land per apartment. "The government should bring in foreign workers. Today, a foreign worker earns NIS 20,000 a month, because there are no workers," she added.
Panning the rental housing program
The forum also discussed real estate investors, against whom war has been declared in the past two years, on the grounds that they are one of the main factors driving up prices. Most of the participants say that the war is a mistake.
"Investors aren’t the enemy; they are the source of the supply of rental apartments," said Dagan. "What's better? One subsidized project in Ra'anana? If investors buy it at market prices and rent [the apartments], the market will work. Rents in Israel are low compared with the rest of the world, and yields are low too. That is why people don’t want to enter the market."
As for Minister of Finance Yair Lapid's plan for 150,000 rental apartments, of which just two tenders have been published to date, leaving open the question about the program's construction horizon, B.Yair Building Corporation 1988 Ltd. (TASE:BYAR) CEO Nir Yechzkely pinned few hopes on it.
"The supply of apartments is dwindling, and as far as rental apartments are concerned, as of now, there is only one project in Ra'anana, which is not even under construction yet, and two new tenders about which no one knows anything," said Yechzkely. "The problem is that even as the government is not creating rental housing, it is harming investors, who are the foundation of the rental market. I think that the government should provide subsidized mortgages to eligible people, like it used to do. It's also possible to boost the periphery with grants, so people can come to the table with equity."
"If you were to take the money that the government is investing in all the rental tenders that it is publishing, and simply give it to users, the reality would be different," said Eitan, commenting on the rental apartment tenders that the government is trying to create. "There was very strong demand in 2013, but for apartments costing less than NIS 1.5 million, because people hit the glass ceiling in terms of their resources as a result of the mortgage restrictions.
"This could change the trend toward building three and four-room apartments from five and six-room apartments, because while people might like to buy a five-room apartment, they can only afford a four-room apartment, and the market will balance itself out. Meanwhile, you should help those who need help, rather than on formulas, such as recognized expenditure on mortgages, which do not change a thing."
"Today, people cannot afford to buy an apartment, and there is a sharp rise in the rents that people under 35 are paying," said. Paz Economy and Engineering Ltd. CEO Daniela Paz-Erez. "I don’t know if the rental program is the solution, but the government should do something to regulate the rental market, so that people entering the market don’t enter a lawless market. You need long-term arrangements and agreements."
Dagan said that rental projects cannot be implemented with their current structure. "The Ministry of Finance looks at the tenders through the eyes of the investment institutions, which is a mistake. When I look at the tenders through the eyes of a developer, I see things differently," he said. "For example, I want to see a return of 9% so that I'll end up with a 7% return. I suggested a different proposal, to build rental projects with five-year leases, after which the tenants can buy the apartments at a discount. The government could offer this option, but why isn't it doing so? The idea came from above. It's also good politics. I don’t know why it's not interested."
No income-producing real estate market in Israel
Investment institutions do not yet consider the Israeli residential market as worthwhile for investment, and therefore only operate in the income-producing property market. Due to the small number of large income-producing properties, the number of transactions is low. "Israeli institutions only make deals if they are forced to do so," said Levy. "There is no seller's market if they don’t have to sell. We sold malls because the Antitrust Authority forced us. When Azorim Investment, Development and Construction Ltd. (TASE: AZRM) had a cash flow problem, it was forced to sell properties, and the same thing happened at Africa-Israel Investments Ltd. (TASE:AFIL). There is no income-producing real estate market in Israel, which is why investment institutions seek investments overseas."
Aspen Group Ltd. (TASE:ASGR) is one company with negligible activity in Israel, compared with its overseas business. "We focus on Western Europe, with an emphasis on Germany," said Aspen Group CEO Ilan Gifman. "In the past month, we made three deal totaling NIS 500 million together with Israeli institutions, such as Halman Aldubi Investment House in the purchase of a properly leased to Deutsche Telekom and which has a yield of 11%, which is hard to find in Israel."
Flood the country with foreign workers
"When Benjamin Netanyahu was finance minister, there were between 80,000 and 90,000 work licenses for foreign workers," said Bayside Land Corp. Ltd.(Gav Yam) (TASE: BYSD1) CEO Avi Jacobovitz about the worsening condition of foreign construction workers. "Today, the official figure scrapes 5,000 foreign workers, and for years, we've been trying to get 3,000 more. As a consequence, construction timetables lengthen and the quality of work deteriorates, building inputs go up driving up apartment prices. The government should wake up and flood the country with foreign workers."
Dun and Bradstreet Israel economics division head Tzahi Baraki added that the condition of the workers has a direct effect on the entire construction industry. Its figures for 2012 show that contractors' gross profit margin was just 5.-7%.
Published by Globes [online], Israel business news - www.globes-online.com - on February 5, 2014
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