When it comes to buying a home, timing can be everything. And for those looking to get into Israel’s real estate market, the timing could hardly be worse.
The past year has seen home prices soar by nearly 20 percent; mortgage rates are also rising, as the Bank of Israel raises interest levels in a bid to curb inflation. Meanwhile, the number of properties available for sale is falling.
But experts say there may be little point in waiting for a better time. The costs of buying a home are expected to keep going higher and higher, although the breakneck pace at which they are rising may slacken.
For a couple like Dina and Ilan, fictional Tel Aviv house hunters with NIS 300,000 ($86,000) in the bank and an itch to get into the market, options may seem limited. But an array of investment avenues and other opportunities provide a number of back doors into the real estate elevator.
In part one of this series, which explored how to get into the housing market today with minimal funds, Dina and Ilan looked at homes available to buy outright and live in. But with their relatively small nest egg, and Israeli rules setting a 25 percent minimum down payment, many apartments in their price range were either old, cramped or far from the center of the country.
Part two looked at options for buying abroad, where homes can be cheaper and rented out for annual returns of up to 10%. But doing so can be risky and not everybody is comfortable owning property they may never see, in a country where they might not be versed in all the local rules and regulations.
This is part three, the last of the series, which will examine alternatives in the wider real estate market that could be feasible for someone with a pot of just NIS 300,000 ($90,000). These include buying apartments near universities and renting them out to students, buying land or commercial space, putting money in a real estate investment fund, joining a peer-to-peer lending group, or snatching the next best thing to a Tel Aviv apartment — a parking space.
Back to school
If Dina and Ilan don’t want to compromise on where they live and raise a family, but still want to get in the real estate market as an investment, the most obvious solution would be to buy an apartment they can afford and rent it out, while continuing to rent a place for themselves.
Dina and Ilan can try their luck in the government’s Mehir Matara (Target Price) housing lottery, which provides 20% discounts off fair market value for first-time buyers. Unlike in the previous state subsidy scheme, Mehir Lemishtaken, those who buy an apartment through the program can rent it out from day one.
However, those who win the lottery don’t necessarily get to buy where they want, and prices in some of the most popular areas may still be out of reach.
An alternative is to focus on buying in an affordable area with consistently high demand for places to rent, for example close to one of Israel’s universities.
Students seen at the Mount Scopus campus at Hebrew University on the first day of the university year on October 23, 2022. Photo by Olivier Fitoussi/FLASh90
Forget Tel Aviv University, though. The average price for a home in Tel Aviv in the third quarter of 2022 was NIS 2,990,800 ($876,557), up from NIS 2,505,500 ($734,323), and the school is located in one of the most expensive areas of the White City.
But suburban Givat Shmuel, which borders Bar Ilan University, is still somewhat affordable. In July, a super small apartment measuring 25 square meters (269 square feet) changed hands for NIS 1,200,000 ($347,323), which is at the top end of our fictional couple’s savings pot with a mortgage. The studio home is located on Jabotinsky Street — very close to the university — on the second floor of a 14-story building constructed in the year 2000 and comes with a much-coveted parking space.
Near Hebrew University in Jerusalem, there are a number of possibilities, including a new development scheduled to hit the market in 2025. But in order to earn rent right away, our couple could try to find something similar to an apartment that sold in early September on Hayim Ozer Street for NIS 1,100,000 ($321,990). The one-bedroom apartment measures 38 square meters (409 square feet), and is in a Haredi area that is not in the neighborhood of the university but would provide quick access by public transportation. The four-story building it is in dates from 1960.
Haifa, home to both the University of Haifa and Technion–Israel Institute of Technology, has lower prices relative to Tel Aviv and Jerusalem. Even bigger bargains can be had in Beersheba, home of Ben Gurion University of the Negev, and in the West Bank settlement of Ariel, home to an eponymous university. And there are many more private colleges all around the country, though many of these are more likely to have students commuting from home and not necessarily looking for a rental near campus.
However, this approach brings with it the responsibilities and costs of being a landlord. It leaves Dina and Ilan living with the uncertainties of the rental market, and comes with extra work, or costs, that come with being a landlord, from maintenance to finding renters and dealing with them.
Rent in Israel is not high compared to purchase prices. The normal yield is around 1.5% to 2%, according to Real Estate agent Daniel Goldstein, which is often not sufficient to cover mortgage payments. This means a rise in overall housing-linked expenses.
Most of the profit on an investment property comes from selling it — and though university areas have risen in value substantially through the recent surge in prices, there is no guarantee that prices and rents will continue to move up as fast going forward. Buying an investment property also means tying up savings in a specific property, meaning they will need to sell — a time-consuming and sometimes costly process — once they decide they want to access their wealth to buy a place to live for themselves.
A better option may be investing in commercial real estate. While prices tend to skew higher than residential, there are properties that come close to being affordable with the NIS 300,000 down payment, like this 103-square-meter (1,109-square-foot) space in central Netanya at a cost of NIS 1,397,000 ($403,000). The rent for this may well be higher than a residential property of the same size, and commercial tenants tend to stick around longer, meaning less hassle and fewer periods when it is left empty.
Getting in on the ground floor
If Dina and Ilan want to take a risk or are not in a big rush, they can go in on a piece of land that may one day be suitable for building a home. Empty residential lots are hard to come by and generally cost more than the couple can afford when the cost of building a home is taken into account, like a plot in Hadera zoned for a two-bedroom property and going for NIS 400,000.
But house hunters can sneak in for a relatively small sum by getting in on the literal ground floor, buying a piece of land currently zoned for agriculture but where plans are in place to eventually allow homes to be built there.
Speculative investments like this come with significant risks. There is no guarantee the land will be rezoned, and even if it is, it could take several years, meaning Dina and Ilan could be waiting a decade or longer until they actually have a new home.
An advertisement for agricultural land outside of Sde Warburg being offered for sale to real estate speculators. (screen capture: Investec.co.il)
But for some, the risk is offset by the chance at buying a piece of land for a fraction of what the same parcel would cost were it zoned for housing. And should the red tape be cut, the value of the land could instantly shoot up by hundreds of percent.
Prices for land vary depending on where it is located and where it is in the rezoning process, but it is often less than NIS 300,000 for half of a dunam (0.12 acres). Banks offer mortgages for land purchases, though they will only take its current value into account and not its possible future value.
The options currently available mostly involve joining a purchasing group to buy a joint plot on the outskirts of a town. Realizing the land’s value requires active partnerships with those with an interest in developing the land, and the building process in Israel is rarely quick or straightforward. But outside of owning a home, owning land comes closest to offering returns that match the market for apartments.
United we profit
Another way to benefit from rising property prices is investing money in a real estate investment trust, commonly known as a REIT. These are common in many mature real estate markets and have started to develop in Israel too.
A REIT is essentially a fund that invests in a mix of properties, primarily large-scale commercial holdings that an individual without high net worth would normally not have the capital to buy outright. The money that you put in buys you that value within the fund, but you don’t hold any properties outright, or have any management responsibility. Professional fund managers buy and sell property for the fund, and as the REIT makes money, investors get a piece of the action.
REITs are heavily regulated to keep them from taking on too much risk.
REIT1 Ltd. was established in 2006, the same year Israeli regulators began allowing the funds to operate here. The fund owns and operates a portfolio of nearly 500,000 square meters (5.4 million square feet) worth of property, including office and retail space, parking and logistics, all located in Israel. It trades on the Tel Aviv Stock Exchange.
The Tel Aviv Stock Exchange, December 25, 2018. (Adam Shuldman/Flash90)
Participants in the fund receive dividends as the fund makes money, and after a period of time can extract their capital. To date, REIT1 has paid investors dividends that equate to an annual yield of 5% to 6%, roughly double what one would make renting out an apartment, but well below the overall increase in property prices.
Another REIT, Sella Capital, says it has delivered average returns of 8% to 9%. It also produces quarterly dividends for investors and maintains a rule that it will only invest up to 60% of the value of the assets. Both real estate funds are exempt from corporate taxes.
A further option proposed by Rifka Lebowitz, a certified financial planner with over 20 years in the market, is investing in a peer-to-peer lending scheme. These are platforms that match lenders to borrowers, bypassing banks and can offer better returns than a regular savings account, albeit well below galloping inflation in the housing market.
Rifka Lebowitz, Financial Planner (courtesy Rifka Lebowitz)
Four such platforms exist in Israel, and they operate by offering money from a pool of investors to borrowers who have been turned down by banks, have been offered unattractive interest rates, or don’t want to take a loan from a bank for any other reason. Lebowitz recommends this option because the P2P loan networks offer flexibility but are still fully regulated.
“The best of them are strict about who they will lend to, and at what rates,” she said.
While they charge management fees, as well as an “insurance fee” against the possibility of defaulting loans, they do not incur capital gains tax, and pay out around 5.5% interest, with the ability in most circumstances to withdraw funds at any time.
“If you specifically want exposure to the real estate market through a scheme of this kind, one option is Tarya who do invest in residential property in a variety of ways, while if you are looking for exposure to the commercial sector there is Btbisrael,” Lebowitz said.
Perhaps the simplest way to hitch a ride on the wild real estate rollercoaster is to buy shares in a real estate company trading on the Tel Aviv Stock Exchange. Options include Israel’s largest real estate group, Azrieli; property developer Shikun & Binui; Alony Hetz; Big; and Airport City. Given their exposure to the real estate market, investing in these businesses can allow investors to get a taste of the underlying price increases in all sorts of real estate projects.
Buyer beware, though. Even though real estate prices are hitting historic highs, not all of these companies have seen their stocks respond in kind. While the TA-Real Estate index nearly doubled in value over the course of 2021, this year it has seen its value dry up by nearly a third.
The house always wins
Every financial adviser interviewed for this series of articles emphasized the importance of buyers making choices based on their preferences for risk versus return, and how long they can afford to have their money locked up for. Real estate investments can be complex and take time to liquidate, but throughout history the sector has offered better returns than any other asset class.
The investment professionals were all least attracted to straight bank investments, but beyond that were widely varied in their personal preferences and professional recommendations.
Asked directly what they would do if they were in Dina and Ilan’s shoes, with NIS 300,000 and a dream of home ownership, the answers ranged across all the possibilities set out through this series, from the starter homes reviewed in part one to foreign investments explored in part two and much more.
But the most creative answer, which came from a Tel Aviv realtor who specializes in high-end luxury investments, was to buy a parking space in Tel Aviv, if you can find one for sale, and install an electric car charging point there.
A charging station for electrical vehicles. (Sraya Diamant/Flash90)
Last year there were only around 100 points across Israel, though that number is set to double this year, with plans in place for even more as electric cars become increasingly popular. Fewer than 20,000 EVs are on Israel’s roads today, but the government estimates that by 2025, 23% of all cars here will be electric.
Energy giant BP expects charging points to beat fuel pumps in terms of profitability over the coming years, and it is very possible that the demand for charging points will outstrip supply for some time, particularly among the environmentally conscious in Tel Aviv.
Crazy as the idea sounds, looking for a parking space to park your money may be the best real estate investment Israel has to offer.
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