If you are looking to make an investment in Israel, financial experts, global asset managers, and government representatives say the property market is a solid and attractive alternative to others. This is due mainly to the fact that despite mounting anticipation of a drop in Israel's real estate prices, property prices remain impervious and continue to rise year over year. This is further compounded by the fact that, in the face of indications that Israel's economy is slowing down, the slower 3.2 percent growth rate expected this year, is still a faster pace than most economies in the U.S. or Europe.
Looking beyond the financial aspects of this type of transaction, there are many emotional aspects that are driving foreign investments in Israel real estate, namely Zionism and the rising anti-Semitism in the world.
Property Investment is Emerging
There are several conditions in Israel's economy that are driving an interest in investment properties. The most obvious is the increasingly high sale prices. The average price of owner-occupied residencies in Israel rose by 4.01% during the year to Q1 2016, to ILS1,423,000 (US$369,107), from annual price rises of 6% in Q4 2015, 5.2% to Q3, and 7.3% to Q2, and 7.6% to Q1, according to the Central Bureau of Statistics (CBS). The main reason for the continued rise in house prices is the supply shortage, due to low construction volumes.
In in the first quarter of 2016, Israel’s economy grew at an annualized rate of 1.3%, as slowing global trade weighed on exports, according to the CBS. In Q1 2016 exports fell by 1.1%, government spending dropped 1.6%, private spending grew 4.8%, yet investments in fixed assets rose by 16.2%
In parallel, we are seeing a decrease in yield from rental properties. Gross rental yields in for apartments in Tel Aviv for example, are near or under 3%. Furthermore, rental income is taxed in Israel. Taxpayers can opt for a flat 10% tax on gross rent (without any deductions), or progressive income tax rates on net income. On the other hand, most properties sold in Israel are exempt from capital gains tax. If the gains are taxable, the net gain is taxed at the standard income tax rates.
For foreigners there are additional factors that may come in to play, such as the sanctions that the government continues to approve in an effort to discourage foreign buyers towards lowering booming prices. For example, in Jerusalem in 2015, a double tax was imposed on "ghost" apartments purchased by nonresidents.
Investments Opportunities Are Evolving
The concept of investment in the real estate marketing is not new to Israel, but as its popularity rises among locals as well as foreigners, the opportunity has begun to evolve over recent years. The investment opportunity in the Israel property market is evolving to broaden its offering to both local and nonresident investors. There are new and often compelling opportunities for a foreigner to invest in Israel that range from urban renewal developments, new residential projects, retail and office space, student residencies, and hotel and hospitality developments, among others.
Whereas a decade ago, investment opportunities may have been limited to rental income from residential or commercial properties, there are other opportunities available today to the overseas investor looking to diversify their portfolio or alternatively for investors with smaller sums at their disposal.
Crowdfunding Enters the Real Estate Scene and Offers An Opportunity For Any Pocket
One of the more innovative programs to enter the property investment market is the crowd-funding method that a number of leading companies are taking ownership of. Crowdfunding, adopted by high-tech startups as an alternative means to raise funds, was limited in Israel by Israel’s Securities Law until 2016. Section 15 of the law dictated that any offer or sale of shares to the public (i.e. to more than 35 potential investors) requires the issuance of a prospectus approved by the Securities Authority; a timely and costly endeavor, formerly rendering crowdfunding prohibitive in Israel.
But as equity crowdfunding is successfully replicated in the real estate market across the world, the concept is catching on quickly in the land of early adopters - Israel. Although Crowdfunding for real estate is a relatively new space, crowdfunding for real estate platforms were responsible for raising over $100 million in 2015 alone for hundreds of real estate properties across the U.S. Real Estate crowdfunding platforms in Israel offer an opportunity for virtually any pocket and the way it works is very simple. Once and Entrepreneur makes an opportunity available to the real estate crowdfunding platform, an investment committee carries out an in-depth due diligence examination of the opportunity, the project, its backers and a financial analysis is also conducted by experts.
Becoming a crowdfunder requires a simple registration process, at no charge and no commitment. Once you have registered on a platform, you are able to decide which investment opportunities are suited to your needs and goals. The ownership percentage is determined in line with the amount one chooses to invest. Choosing the right platform is an important step, as one must be weary of the investor protections offered, as well as any possible hidden fees. There are also several real estate brokerage firms who may attempt to present themselves as crowdfunders so an in-depth inspection of the platform is always prerequisite.
Real Estate Investment Trusts Also on the Rise in Israel
Another alternative to investing the traditional way is the Real Estate Investment Trust (REIT), that enables you to enter the market by investing in income-generating properties such as offices, stores or warehouses. There are various types of real estate investment trusts, some pose high entry barriers and others enable very low ones with an entry limitation as low as 1,000 shekels. If you have 100,000 shekels to invest , there is a wider range of real estate investment trusts, each with its own entry barrier and business model.
The REIT enables an investment in property for a share of the returns delivered as periodic dividends. Similar to investing in securities, investing in property through a REIT, could also mean exposure to the same level of volatility. There are several up-and-coming REITs in Israel today, a number of which are publicly traded and highly regarded, and although investing in a REIT could be considered riskier than a direct investment, in the long run the returns are similar. The process however, is much simpler than investing directly in a commercial property and entails fewer complications.
What's important to keep in mind here is that Israel's economy, largely facilitated by its powerful property market, proposes a solid basis for investment. Its emerging opportunities reflect Israel's forward-thinking entrepreneurship and the increasing flexibility can present an opportunity for every investor. The way you choose to enter the investment arena will be specific to your needs and an informed decision will make all the difference.
Be In The Know with Ha'aretz Real Estate Arena
This article was brought to you by the Ha'aretz Real Estate Arena, a new initiative designed to create a hub of information and resources for foreign residents with an interest in property in Israel.
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