Vacant lots are among the most promising real estate investments in Israel, according to a survey of prices in central Israel from 1986-2006, conducted by the Neot Shiran real estate firm, a leader in the field of upscale real estate in the center of the country. The survey reveals that, during that 20-year period, prices rose by a real rate of 3-4 times the original, on average, and that the price of ultra-prestigious land lots rose by thousands of percentage points.

The survey indicates that the most basic form of property, land, may be a surprisingly valuable investment although it involves no lack of risk.

"If we make an analogy to the stock market, an apartment might be a share and a lot an option, because you may always realize its potential in its current form or upgrade the property by building on it," explains economist Professor Daniel Gat of the Technion - the Israel Institute of Technology.

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"In the stock market, an option behaves more extremely than a stock. It rises sharply and falls sharply. In extreme cases, it may be worth almost nothing. Lots respond acutely to market conditions - much more acutely than apartments. Therefore, when the price of apartments decreased, the price of lots fell, and when apartment prices increased, the price of lots took off."

The main reasons for the difference in behavior between the prices of lots and apartments include the costs of building and planning and the contractor's initiatory profit margin, in addition to land value. For example, if the price of lots increases by 20 percent, the price of apartments on that lot may increase by only 5-8 percent.

And what about falling prices? A portion of the Israeli land market enjoys a certain level of insurance in the form of a chronic lack of lots in desirable areas in the country's center. Insufficient rezoning and slow marketing of land by the Israel Land Authority produce surplus demand. There is no better proof of this than the occasional sale of land in good locations by the authority - dozens of entrepreneurs jump on these opportunities.

"In the center of the country, it is now more profitable to be a land trader than a contractor," complains a marketing director at a major construction firm. "When negotiating purchases or implementing package deals with landowners, we are confounded by demands from here to eternity. And when I add the cost of this land to the rest of the costs, I get prices for apartments that exceed those of the market. That's even before adding profit into the equation."

This reality is doubly pronounced when investigating lots slated for construction of villas or cottage apartments, referred to as "on the ground" properties in local real estate jargon. These lots are a limited commodity sought by thousands of buyers keen on achieving the Israeli dream of a home "on the ground."

The Neot Shiran survey included six upscale neighborhoods in the center of the country with "on the ground" properties - the southern part of Afeka, Herzliya Pituah, Kfar Shmaryahu, Savyon, Tzahala, and South Tel Baruch; and three less prestigious communities - Even Yehuda, Gan Yavneh, and Mazkeret Batya. The survey compared 1986 prices with current prices.

It is important to examine the two points in time included in the survey, 1986 and 2006, before examining its findings.

The first year marked the climax of a profound crisis in the market. Three years earlier, in 1983, apartment prices were already starting to decrease. This descent was mainly caused by the continuing war in Lebanon and infamous inflationary policy that led to triple-digit inflation and lack of faith in investing in the local market.

One of the outcomes of that period was a sweeping shift to the dollar as the real estate market's official currency. The reason was simple. Local currency lost its value in the ensuing selling panic: it changed twice (from liras to shekels and then to new shekels), and it was impossible to close a major deal, like an apartment purchase, when the early 1984 shekel was worth five shekels by the end of the year.

By 1986, increasing implementation of the ambitious economic plan portended an end to the crisis, but the real estate market sunk by 30 percent in comparison to the levels of the early '80s. Soon thereafter, in 1988, the trend reversed, revealing the first signs of the "'90s big boom."

By contrast, 2006 is a year in which current trends in the "on the ground" real estate market, in the center of the country, are a continuation of those seen at the beginning of the year: Rising prices and demand follow signs of economic growth in a number of market branches, particularly high-tech, and increased sales of plum properties to foreign residents. Despite that, the real estate market in most peripheral areas continues to stagnate, and those regions have yet to recover from the crisis that plagued the entire market 10 years ago.

According to TheMarker's predictions, many "on the ground" neighborhoods will continue to see rising prices in 2007, and current price hikes are not the final word.

Neot Shiran's survey unequivocally reveals: anyone who purchased a lot in an upscale "on the ground" area in mid-1986 got a good deal.

The survey reveals that the value of purchasing lots is not limited to plush neighborhoods: the three humbler communities examined in the survey (Even Yehuda, Mazkeret Batya, and Gan Yavneh) also exhibit an increase in real prices to 3.5 times that of their 1986 value (compared to 6.5 percent annual interest).

Does this mean that the first thing one should do after the holidays is run to search for a lot for the purpose of investment? Readers are advised to look before leaping. One must remember that 1986 was a calamitous year in Israeli real estate, and while 2006 was not, current land prices are not at all low.

Current investors must identify communities that the wave of rising prices has missed, in which land is still cheap and forecasts are rosy - in other words, communities in which circumstances are likely to change, for good. There are those who would include Hadera and Pardes Hannah-Karkur in such predictions. In recent years, a considerable number of lots have been purchased in both areas - some by major contractors like A. Dori, Africa Israel, and Hefziba.

Contractors Yigal Damari and Eli Elezra believe the future resides in Ashkelon, because the prices in that city are considerably lower than those in the neighboring city of Ashdod. Are they right? Time will tell.

"You have to be the right age to purchase lots and have the required patience. Otherwise, it's a shame to invest effort and funds," concludes Gat. "If you ask me for my advice, I would not recommend that those who are 50 or older invest in lots, and I would advise investors to prepare for unpleasant surprises in the future."