Energy and real estate magnate Yitzhak Tshuva is allying again with fellow Israeli business giant Egal Ahouvi, and this time they've set a record. The two Israeli property magnates are entering the biggest property portfolio transaction in Swiss history, says Tshuva's Tel Aviv-listed Delek Group.

Ahouvi and Tshuva, who have done big business in Britain and Germany, too, have agreed to buy a portfolio of 88 prime properties from Switzerland's Jelmoli Holdings for the vast sum of $2.8 billion, or NIS 12.2 billion. The Delek-led consortium beat several leading European property groups to close the prestigious transaction.

The Delek-Ahouvi consortium also has an option, exercisable until the end of 2007, to buy the Jelmoli House of Brands, a majority interest in Jelmoli Bonus Card and Jelmoli Service as well, Reuters adds.

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The two Israeli-led business groups are each putting up half the investment. They might decide, however, to bring additional partners into the transaction. Jelmoli, for its part, is selling because it is restructuring as an investment company. Earlier this year it agreed to sell its appliances and multimedia divisions.

In the Jelmoli deal, Tshuva is acting via group companies Delek Real Estate and Delek Belron International subsidiary Delek Global Real Estate. Investors applauded the deal: shares in Delek Real Estate gained 5.85 percent yesterday and shares in Ahouvi's Tel Aviv-listed company Ravad jumped by 11.5 percent, even though it isn't known whether Ahouvi actually means for Ravad to play any role in the transaction. It is known that Ahouvi is buying his 50 percent through his privately-held company Blenheim Properties Group.

The announcement by the companies to investors was rich in details, but too spare to be able to judge the merits of the deal, especially in these jittery days when the world investment community is sweating at the thought of a possible credit crunch and retreat in the world property market.

Nor do the announcements elucidate how the Israeli consortium beat the rest of the world to the portfolio.

What can be said is that the deal is purely financial in nature: very little property development is involved.

Nearly 20 percent of the portfolio consists of office buildings. All the rest consists of commercial buildings and shopping centers, according to Delek. The 88 assets have 530,000 square meters of leasable space, plus two projects under development. Tshuva and Ahouvi are buying that space for SF 3.4 billion and are receiving in return lease income of SF 155 million a year. That translates into a fairly low 4.6 percent level of returns.

Delek says that the returns will rise to SF 183 million in 2009, which means that returns will range from 4.6 percent to 5.5 percent, in terms of Swiss francs, which is not terribly impressive. Investment in German government bonds, for instance, would generate 4.5 percent, in euro terms, with absolute security.

Deals like this typically involve heavy leverage, and this one is no different.

Merrill Lynch has promised to lend the Delek-led consortium up to 85 percent of the total investment, or NIS 10.2 billion, through a non-recourse loan guaranteed by the properties themselves. Delek will be putting up 320 million Swiss francs in shareholders' equity. Other than that, it did not disclose details of the financing arrangement. Similar deals involving Swiss property have typically cost the borrower about 4 percent a year, which translates into a cost of SF 116 million.

Delek did not say whether it will be returning the principal to Merrill Lynch in stages, or only when it exits - meaning, sells properties, which is quite the norm in deals of this magnitude. If indeed the buyers don't need to start repaying principal quickly, their rate of return on equity, based on rental income, would jump to about 12-13 percent a year.

If you've toured Switzerland, you've probably seen at least some of the buildings that the Israelis are buying.

The portfolio includes the iconic Jelmoli department store in Zurich, the Grand Passage in Rue de Rhune in Geneva, the Place du Molard in the same city, and central buildings in Lausanne, Bern and other main Swiss cities.

The lease agreements incorporate an automatic increase of rent each year. At present, though, the rent per square meter is very low relative to the market for prime Swiss properties.

Delek adds that some of the leases are as long as 25 years, but the average works out to 13.5 years. Once the two projects are completed, the portfolio is expected to generate annual leasing income of NIS 659 million. One of the projects is a shopping center in St. Glen, with space of 40,000 square meters, which is slated to open in April 2008. The other is a shopping center near Geneva, with 11,000 square meters of built-up space, which should open in October 2008.

Merrill Lynch has promised to lend the Delek Group up to 85 percent of the total investment , or NIS 10.2 billion, through a non-recourse loan guaranteed by the properties themselves. Delek will be putting up 320 million Swiss francs in shareholders' equity.

Delek Real Estate manager Ilik Rozanski said the deal demonstrates the ability of the group, with Ahouvi, to pull off quality transactions of an international scope. Well said, but it is also true that Tshuva and Ahouvi must be hoping the Swiss property market doesn't tank and that in seven to ten years, the usual life-time for a purely financial deal, they'll be able to exit at a profit.