Israeli developers tremble as E. Europe property market wilts

After years of riding high on the hog, Israel's real estate developers who targeted eastern Europe are in hysterics. "It's a catastrophe," one moaned this week: banks aren't lending a sou to developers or to homebuyers. Sales have ground to a halt. It's going to be a cold winter, as stock exchanges the world over post their steepest monthly retreats in history, including the benchmark index on Wall Street, the S&P-500 index.

Two months ago Nuri Katz, president of the Century 21 group in Russia, was bullish and confident that "thousands of Russians" would be buying apartments in Israel. Now he's seriously glum: "Our economic situation has never been this bad," Katz says. "In the last two years we thought Russia was economically strong. It had so much oil and so many oligarchs." Today? "The situation is unbelievable. Nobody's transferring money. Nobody's paying debts. Banks are collapsing and developers who had depended on credit can't get loans. Everything has frozen solid." A week ago Russia's third-biggest property broker, Doki, crumbled.

Many major Israeli property developers had targeted Russia, including Lev Leviev's Africa Israel and Eliezer Fishman's group, and they're going to hurt, says Katz. Companies in a liquidity crisis are already selling land at a loss, he adds. Prices in Moscow have fallen by 35%.

Katz isn't the only one running scared. "The situation in eastern Europe is catastrophic," says the CEO of an Israeli property company. "Nobody's sold a single apartment for three months." He means to go on holiday, for lack of anything better to do. "I'm not going near eastern Europe. There's going to be an economic holocaust over there. We're going to see all those companies that issued bonds on the Tel Aviv Stock Exchange asking to postpone repayments, or defaulting. And that won't be the end of it. Everybody thinks it's the little companies that are in trouble, but we're going to see the big ones falling there, too."

In three months Russian stocks have lost 50%, Hungary's shares dropped 44% and Romanian and Ukraine stocks fell by about 40%.

Less dramatically, the manager of one afflicted company says sales in Israeli projects in eastern Europe have fallen by 50%. Other more conservative estimates speak of a 25% drop. But these are statements from a sector where management usually stays on the sunny side. When the trouble began the minnows said the whales were in trouble with their grandiose, heavy leveraged projects. The whales said the minnows would drown. Now they're all hysterical as their options range from bad to terrible.

They can sit on land instead of developing it, and pay interest on the loans they took to buy it. Developing the land, building housing or commercial space, would probably cause them far greater losses. The bigger the companies, the greater their loans and interest payments, explains Gal Oren, a partner in an Israeli law firm that operates throughout eastern Europe. If the companies can't make the interest payments they forfeit their assets. But the banks aren't eager to foreclose: they foresee getting stuck with oceans of assets that are plunging in value, Oren adds. They'd lose their pants, too.

Eastern Europeans may still aspire to move beyond the archaic model of one multi-generational family, one apartment. But the banks aren't lending, and the situation is worst in Russia, says Katz. And as property prices plummet, buyers are wriggling to shake off contracts.

In Ukraine the situation is so grave that the ATMs are empty, says Avi Maor, co-CEO of Hanan Mor. "People can't withdraw money from the banks. There is no money," he says. Hanan Mor exited in time, seeing the writing on the wall even as the subprime crisis was just gaining steam in the U.S., he says. After all, the buyers in eastern Europe hadn't only been locals: they'd been western investors, too.

But Yaki Amsalem of Almog says the market for luxury apartments is unaffected. "In Bucharest we can still get 7,000 to 8,000 euros per square meter."